How Checking Performance Might Hurt Your Performance

As your investment manager, we strive to maximize your returns and reduce your investment costs. But did you know that we also try to help you reduce your stress?

How Checking Performance Might Hurt Your Performance

I believe most people check on their investments far too often. If they fully understood them, they’d spend less time monitoring their accounts, and more time gaining knowledge about investing.

Don’t feel bad—I’ve done this myself. After years of reading about and following the markets, I’ve realized that I’ve wasted precious time and attention that could have been better spent elsewhere. I hope you can learn from my mistakes.

Paying too much attention costs more than just your time.

Checking on your investments frequently, which to me means more than once a quarter, may:

  • Make you more risk-averse than you probably should be.
  • Mislead you about the future returns you might accrue.
  • Increase your risk of performance chasing, which could reduce your returns.
  • Make you unhappy with your portfolio, regardless of the actual performance.

It’s appropriate to take on risk when you’re investing for the long term.

Our advice for how much risk you should take is based on how long you’ll be investing for. The longer you are investing for, generally the more risk you should be taking on.

This principle is something that you know to be true intuitively. An experiment by two Nobel Prize-winning behavioral scientists aimed to prove this by showing students investment returns from the same portfolio for various timelines: a month, a year, and five years. They found that the shorter the time period the returns were generated from, the less risk the students were willing to take. These results were also replicated among workers who invest in their 401(k) plans.

If you’re checking performance of the stock market daily, chances are that you’ll see a loss about 50% of the time. If you check on it just once a year, that chance drops to about 25%. At seven years, the chance of seeing a loss drops to 1%.

The graph below shows that the probability of experiencing a loss decreases over time. This tells us that looking at short-term returns when you’re investing for a long time may feel riskier than it actually is, because you’re paying attention to those short-term losses. Even though you might see immediate losses, staying invested for a longer period of time means that those losses may turn into gains if the market goes up. Since the market generally tends to move in an upward direction over time, the likelihood you’ll see gains generally increases as time increases.

one year probability of loss compared to holding period

Source: Based on S&P 500 daily total return data since 1928.

The past is a poor prophecy of what the future will be.

Just as today’s winning lottery number isn’t related to yesterday’s, knowing which stocks performed the best last month probably won’t tell you which stocks will perform the best this month.

Apophenia is the human bias to see patterns when there are none: faces in toast, patterns in coin flips, even large-scale conspiracy theories. If a simple pattern isn’t apparent, we’ll imagine that there must be a complex one to explain it.

We might see a pattern of the market going down, and we think that it will keep going down in the future. We react by changing our allocation to be more conservative. We then kick ourselves when the market shoots up the very next day.

A reaction I hear a lot from customers: “I’m sure that’s true for most people, but not for me. I just look at it and never react.”

Our data shows otherwise. The more frequently customers log in, the more they:

  • Change their allocations.
  • Turn off auto-deposits.
  • Quit investing entirely.

Line graph showing allocation changes increasing as logins increase

Source: Analysis of Betterment client data. Each line represents a different subset of customer groupings based on tenure.

Performance chasing can lead a moth right into a flame.

Like a moth to a flame, even professional investors can get caught in the trap of being drawn to funds just because they have performed well recently.

A 2008 study looked at the decisions of professional 401(k) managers. Managers tended to “hire,” or put money into funds, which had substantially higher returns recently. They tended to ”fire,” or take money out of, funds with worse performance. The problem was that the recently “hired” funds then went on to underperform, and the “fired” funds went on to perform better. In other words, the managers earned lower returns because they chased the performance of the funds, reacting to changes after the fact.

Before you laugh at the so-called professionals, know that DIY individual investors exhibited the exact same behavior, with the exact same results. A 2019 study by Morningstar showed the same behavior, including moving into previous out-performers and away from previous under-performers. Once again, the funds that performed well in the past did not go on to outperform.

A 2014 study by Vanguard found that performance chasing could cost an investor between 2 to 4% per year.  Bear in mind that annual expected returns on stock portfolios are generally in the 5 to 7% range. This means that investors could lose about 40% of their expected returns over time—just for making decisions based on the recent past.

Checking your performance isn’t going to make you happy.

There are two phenomena that behavioral scientists come across frequently when studying people: adaptation and loss aversion.

Adaptation is the tendency to run on a hedonic treadmill, which means our baseline moves upward easily, but not downwards. It works like this: The first time upgrade to first class on an airline is a joy, but as you keep doing it again and again, it’s no longer as exciting as it used to be.

Loss aversion means that we tend to feel losses more powerfully than we feel gains. For example, your emotional response to a 1% loss is as strong as your emotional response would be to a 2% gain. After a taste of flying first class, downgrading back to those economy seats feels bad, doesn’t it? The intensity of that negative feeling is likely stronger than the intensity of the positive feeling you felt when you upgraded.

Let’s imagine that a behavioral scientist puts you into a portfolio where you can’t change your investments in response to historical returns, however, you’re still forced to watch your returns in real-time. In this scenario, you’d be unhappy the vast majority of the time. This is simply because a portfolio is always going to be either experiencing an all-time high, or experiencing a drawdown. The truth is that all markets spend most of their time in a drawdown.

You can think of your portfolio as if it were a friend’s small child. If you look at a child every day, you probably won’t notice any changes. If you want the joy of saying “Oh my, how you’ve grown,” then you’ll need to space out those visits more.

Here’s how we try to help you stress less.

We want to help you succeed. At Betterment, we take the time to design and deliver features that help you stress less about your account so that you can focus on what matters in your life. While we do want you to check your account quarterly, we don’t want to push you to check it daily or even weekly.

One of the ways we can keep you informed while also moving away from a hyperfocus on performance is by using as broad of a frame of reference as possible when we show you your performance information.

Some examples of how we keep your performance context broad include:

  • Showing the performance of all the accounts inside a specific goal as one number, rather than as separate numbers.
  • Showing the performance of your whole portfolio, not just the individual funds inside of it. We built a diversified portfolio for a reason, after all.
  • Showing total returns, which include price changes and dividends together, instead of breaking them out separately. Price changes alone are more volatile than total returns and don’t show the overall picture.
  • Showing your performance over as long of a period as possible, rather than in short time frames, to help reduce the feeling of loss aversion.

Since frequent monitoring of performance tends to result in worse outcomes, it’s not something we’re going to push our customers to do. However, if you do want to focus on performance, we won’t stop you. You’ll be able to see a rich and description of your performance within your account.

The next time you feel the urge to check on your performance, consider if you’ll benefit from doing so. The odds are good it will lead you to take on less risk, waste your time looking at yesterday’s news, underperform by chasing winners, and ultimately be unhappy about your portfolio.