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It’s not healthy to check stock prices every day

December 16, 2017 emcee 2 Comments

Picture by SarahG

If you check your stock portfolio every minute the market is open, you are setting yourself up for failure. Even every day is not good for your portfolio’s health. Perhaps every week is too frequent. Two reasons why this is so:

  1. Every-day price changes are random and carry no useful information. You can’t discern where the market might be heading next from its daily gyrations.
  2. We humans feel the pain of losses (even unrealized kind) twice as much as the pleasure from gains. You will be emotionally drained if you check stock prices every day.

There is a great section in Nassim Taleb’s book, Fooled by Randomness, that illustrates this point well. He introduces a fictional character, a retired dentist, who is also a darn good investor. This dentist is expected to make, on average, 15% yearly return with ±10% variability. Any given year, his returns could be anywhere – occasionally even negative. But over two-thirds of the years, his yearly returns will range from +5% to +25%. The chance of his getting a positive yearly return is 93%.

This is pretty good performance but here is the kicker! He wouldn’t know this if he checks his portfolio value every minute, every hour, or even every day. See this table (taken from Fooled by Randomness):


If he checks his annual returns once a year, there is a 93% chance that he’s had a profitable year. If he checks in every quarter, there is a 77% of his getting a positive quarter. Similarly, if he checks once a month, the chance of a positive month drops to 67% of the time. By checking more frequently, the probability continues dropping – for instance there is only a 54% chance of getting a positive daily return.

This is not anything unusual and can be easily proven mathematically – assuming stock prices move randomly in the short-term – which they do.

The key point is: even when you are such an outstanding investor that you will make year-end profit 93% of the time, if you check your portfolio every day, you will still see losses nearly half of the time.

Checking your portfolio every hour or every minute is even more futile. There is nothing useful you could deduce about your investment progress.

“When I see an investor monitoring his portfolio with live prices on his cellular telephone or his handheld, I smile and smile.“
– Nassim Taleb in “Fooled by Randomness”

Financial media is obsessed with daily gyrations of the stock market. As Taleb showed with his little experiment, even if the stock market is trending upwards, we wouldn’t be able discern it from its hourly, daily, or weekly fluctuations. Such is the nature of a random walk.

“A random walk is one in which future steps or directions cannot be predicted on the basis of past actions. When the term is applied to the stock market, it means that short-run changes in stock prices cannot be predicted.”
– Burton Malkiel, “A Random Walk Down Wall Street”

Once a quarter portfolio check is all that long-term investors should care about. After all, we are in it for years – not days or weeks or even months.

As for me, when I am dollar-cost averaging into a retirement account as I did for 20 years, I set it up on auto-pilot – a portion of my paycheck gets transferred into the account and one or more broad-market index funds are bought with it. I don’t need to check my account frequently – I check once a quarter, rebalance if I need to, and let it be.

When I buy individual stocks, I intend to keep them for five year or longer. If the business continues to do well, I am happy keeping my shares. I sell if the long-term business prospects deteriorate. You can see from my portfolio that I have many individual stocks that I bought 5 or more years ago.

I remind myself that I am in it for the long-haul. I am prepared for both the market up-cycles and the inevitable down-cycles. The money that I need for the next three years does not go into my investment portfolio.

In effect, I try to remove any incentive to quickly react to a stock market move. Then I just watch the show from a sideline!


A FOOTNOTE
For the mathematically inclined … the retired dentist’s returns are assumed to be normal-distributed (bell shaped) with a mean return of 15% per annum and standard deviation of 10%. Hence, there is a 68% probability that he will get a return of 5% to 25% per annum (within one standard deviation) and a 95% possibility that he will get a return between -5% to 35% (within two standard deviations). From the same bell-shaped distribution, we can further deduce that in any given year the probability of his getting a positive annual return is 93%.

Investing, Investing Mindset Indexing, InvestorBehavior, LongTermInvesting

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