Finance 101 – Patience
When their life savings are at stake, it is only natural for investors to continually monitor their portfolio to ensure that everything is running smoothly. As with most things investing however, doing what feels natural is a recipe for underperformance.
In his seminal work “Thinking, Fast and Slow”, Nobel Prize winning behavioural psychologist Daniel Kahneman wrote that “Closely following daily fluctuations is a losing proposition, as the pain of the frequent small losses exceed the pleasure of equally small gains”. This the Loss Aversion bias in action, which we have covered in a previous Finance 101. Most investors will check their portfolios after reading hysterical headlines in the financial papers, which is why they would be better off avoiding financial publications (with the exception of TW3, of course).
So how often should you check your portfolio? In the words of one money manager “If you own growth stocks, you should only look at the price every 12 months. That way, you’ll only suffer one sleepless night a year”. Successful investing requires a degree of patience that most people simply do not have, which is why one of the key roles of a financial adviser is to simply guide you through the inevitable twists and turns of the sharemarket. To quote Warren Buffett “The stock market is a device for transferring money from the impatient to the patient”.