High-Frequency Monitoring: A Short-Sighted Behavior
Investing is a rare case of generally earning more by working and stressing less. Our advice? Take a vacation from monitoring your returns.
There are 10 million bits of information moving through this space every second.1 And it poses a subtle threat to your retirement savings. It’s not high-frequency traders—it’s closer to home. It’s high-frequency monitoring, driven by your own brain.
The more frequently you check on your investments, the worse it will likely seem they are performing. So the more frequently you monitor, the less likely you are to be investing correctly for the long term. And it’s getting harder not to look—we are prone to look at our smartphones, home to your money and finance apps, up to 150 times a day.2
While it may seem like good stewardship to frequently log into your account to check on your performance, in reality this is likely to:
- Stress you out
- Encourage you to tinker with your investment allocations
- Hurt your investment performance
Yes, all three. Research has shown that the more investors monitor their portfolio, the more risky they perceive investing to be—a phenomenon known as myopic loss aversion. Over-vigilance also gives investors more opportunities to react to short-term returns by changing their asset allocation.
Betterment’s own research found that higher login rates is associated with an investor’s behavior gap—the difference between your investment returns and your personal take-home returns.
It’s a statistical artifact of the stock market that the more frequently you monitor your portfolio, the more likely you are to see a loss since you last looked. This fact, taken in combination with loss aversion, has been proposed as the reason the equity risk premium is so high.
An investor who checks his or her portfolio quarterly instead of daily reduces the chance of seeing a moderate loss (of -2% or more) from 25% to 12%. And that means he or she is less likely to feel emotional stress and/or change allocation.
Perceived Losses by Login Frequency
Evidence supports the idea that myopic loss aversion reduces investor returns. Directly from the research itself:
Investors who got the most frequent feedback (and thus the most information) took the least risk and earned the least money.3
Ensuring our customers behave themselves and are not stressed by short-term returns is a big part of our job. One of the ways we are starting to improve investor behavior and sentiment is simply by measuring it first. As we learn more, we are developing systems to improve investor behavior (and we will be publishing more analysis on this topic in the future).
In the chart below, you can see the distribution of “login rates” amongst our customers across mobile and web.
- About 10% are superstars—they log in less than once per month. By doing so, they have reduced their chance of seeing a loss by about 6%.
- The majority of customers (55%) log in less than once per week.
- About 30% of customers log in between once per week and every other day. We are super flattered that they love our website so much… but there isn’t too much information to be gleaned about your performance over such short periods of time.
- Finally, we have the cases who might want to dial back on their investment monitoring—customers who log in at least every other day. These customers are likely stressing themselves out needlessly, without any improvement in performance.
Customers' login rates show the patterns behavioral finance would predict. The following characteristics correlate with a tendency of an individual to monitor his or her account:
- Being male (8% higher)
- Being younger (3% higher for age 30 and younger)
- Less tenure with Betterment (4% per year)
- Lower net worth
- A higher balance
- Using Betterment’s mobile app (much easier to check it, after all)
Note, however, that these are average demographic tendencies; there are young men in our customer base with high balances who do not log in often. Individuality matters.
Who Monitors Their Portfolio Most?
Individuals who log in often may counter that they are systematically improving their performance by being more active and diligent. Unfortunately, this is rarely the case. Login rate is usually associated with a higher behavior gap, i.e., lower investor returns compared to a passive approach.
Investing is a rare case of generally earning more by working and stressing less. Rather than work against that, take advantage of it, and take a vacation from monitoring your portfolio.
3 Thaler, R., Tversky, A., Kahneman, D., & Schwartz, A. (1997). The effect of myopia and loss aversion on risk taking: An experimental test. The Quarterly Journal of Economics, 112(2), 647-661.