With the proliferation of online platforms and stock-ticker apps, your data-loving clients might be doing themselves more harm than good by checking on daily investment performance. One firm ran some data of their own to assess the emotional fallout from too much screen time with the markets.
Analyzing positive performance data from the S&P 500, a Richardson GMP report finds that if clients view investment performance daily, they might as well flip a coin to determine whether the portfolio will be up or down.
The result: daily checks would be “an emotionally draining experience with 11 pleasurable days versus 10 unpleasurable over a twenty-one trading-day month,” says the report.
The least emotionally taxing experience for clients is when they check their portfolios once a quarter, with performance positive about 68% of the time.
In addition to the emotional drag, daily checks are also irrelevant, says the firm. Referring to the selection and oversight of investment managers, the firm says it’s impossible to cite the timeframe required to thoroughly understand managers’ investment abilities—though it’s not a short period.
“The shorter the timeframe, the better the chance that the results are representative of randomness versus any type of skill,” says the report.
The above two examples relate to recency bias, which is placing too much emphasis on the most recent piece of information received, instead of seeing the big picture—something investors must guard against.
As another example, the firm cites a Morningstar study of U.S. equity mutual funds with 10-year track records. More than 90% of the top funds underperformed the category for a period of at least three years, and 40% of managers spent at least three years in the bottom decile.
“A lot of investors, likely us included, would stop using that manager after a prolonged period of bottom-decile performance,” says the report. “Obviously, this would be the completely wrong time, because if they have a 10-year performance in the top decile, those other years on average must have been tremendous.”
That’s some data worthy of clients’ consideration.
For full details, read the Richardson GMP report.