Why you don't need to monitor your portfolio daily

Most of us have learned and believe that the key to success in the stock market is to perform a detailed company analysis. But is it enough? Is it the only winning factor? Often, one of the most underrated yet important factors behind long-term wealth creation is controlling one's emotions. Although investors know that market timing leads to wealth maximisation, they seldom apply it to themselves. More often than not, people are emotionally so invested that a field called 'behavioural finance' exists, which solely studies investors' market habits and biases.

Behavioural science tells us that one of the most common biases that plagues almost every investor is loss aversion. It explains why people hold on to their losses and immediately square off their gains. In simple terms, people regret their losses more than they enjoy gains of similar proportions.

Myopic loss aversion: A familiar foe

Another version of this investing bias is myopic loss aversion, derived from a riddle by the Nobel laureate Paul Samuelson. He asked a colleague if he would be willing to accept the following bet: a 50 per cent chance of winning $200 or a 50 per cent chance of losing $100. Though initially, the colleague turned down the offer, he reconsidered it on two conditions: one, he could play the bet 100 times and two, he did not have to observe each outcome.

Nobel laureates Richard Thaler and Shlomo Benartzi gave their own interpretation regarding this investing bias. Based on this scenario, they concluded that the longer an investor holds an asset, the more attractive it becomes, provided it is not frequently evaluated. Daily price fluctuations make investors loss averse, pushing them to sell a potential multibagger even if there are minor downturns.

To sum it up, the two factors contributing to investor turmoil are loss aversion and frequent portfolio evaluation. Thaler and Benartzi coined it as 'myopic loss aversion', a medical term for short-sightedness.

To understand if this is indeed the case, we examined the price patterns of Sensex over the last 20 years. We found that out of the 4,971 trading days, only 445 days contributed to its 13 times rise. On the remaining days, the Sensex either fell, consolidated, or recovered to its previous highs (which overall neutralised and gave zero returns). We also checked the same for various multi-baggers in the last two decades, and the results remained the same.

While these companies have created immense wealth for investors, it has not been consistent through time. As we can see, less than 10 per cent of the days contributed to most of the wealth creation. Rest of the days, the stocks were either at a loss or stagnant.

However, if you were invested in these companies and checked your portfolio frequently, then there is a high chance that your loss aversion would have kicked in. Sometimes, it is enough for you to panic sell and even sell at a loss. It is only by having a strong conviction in your investment strategy and not checking your portfolio frequently you can avoid this bias or trap.

No investor can predict the days when wealth creation will happen. It could either happen within a short period or sporadically throughout the years. So, as an investor, your best option is to stay invested in fundamentally sound companies for the long term and not base your decisions on short-term market volatility.

Also read: The power of long-term investing

This article was originally published on October 27, 2023.