Earlier this week, we examined a pair of studies that sought to explore the relationship between the equity premium puzzle and investor behavior, specifically a behavior known as myopic loss aversion (MLA). MLA describes the tendency of investors who are loss-averse to evaluate their portfolios too frequently, thus causing them to take a short-term view of investing. That, in turn, leads to a focus on the short-term volatility of the market and, as a result, they invest too little in risky assets.

Today we’ll look at some evidence from the academic literature that illustrates how MLA can be impacted by the frequency with which an investor evaluates his or her portfolio, as well as its implication for investors and some other possible explanations for the equity premium puzzle.

Looking Hurts More Than Not Looking

Based on historical evidence for the S&P 500 Index from 1950 through 2014, investors who check their portfolios on a daily basis can expect to see losses 46% of the time and see gains 54% of the time.

However, while they see gains more frequently than losses, because the average investor tends to feel the pain of a loss with twice the intensity that joy is felt from an equal-sized gain, the more often investors check the value of their portfolios, the more net pain is felt.

The pain/joy meter for an investor who checks his or her portfolio daily will show an average of -38 ([-46 x 2] + [54 x 1]).

Over the period 1927 through 2015, investors who resisted the urge to check their portfolios daily and moved to a monthly check experienced losses only 38% of the time. That reduced the net pain reading from -38 to -14 ([-38 x 2] + [62 x 1]).

Over that same period—1927 through 2015—losses have occurred only 32% of the time on a quarterly basis. Investors who reviewed their portfolio values quarterly (like many who participate in 401(k) plans and receive quarterly statements) experienced a shift from net pain to a net joy reading of +4 ([-32 x 2] + [68 x 1]).

Finally, investors whose patience and discipline allowed them to check their values only on an annual, calendar-year basis experienced losses over that period just 27% of the time. That results in a large improvement in the net reading, from +4 to +19 ([-27 x 2] + [73 x 1]).

As you would expect, the frequency of losses continues to diminish over longer time intervals. The pain/joy reading improves accordingly, and makes for a happy (and more successful) investor.

Implications

The implication for you is that, if you are a masochist, you should be checking the value of your portfolio as frequently as humanly possible. For the rest of us, the implications are striking.

First, the more frequently you check your portfolio, the less happy you are likely to be and thus less able to enjoy your life.

Second, all else equal, the less frequently you check the value of your portfolio, the more equity risk you should be able to take.

Third, the more frequently you check your portfolio, the more tempted you will be to abandon your investment plan in order to avoid the pain of seeing losses.

If you cannot resist frequently checking your portfolio’s value, consider investing more conservatively, because you will be feeling the pain of losses more often. Feel enough pain and even the most well-thought-out of investment plans can end up in the trash heap of emotions as the stomach takes over the decision-making process. And I’ve yet to meet a stomach that makes good decisions.

There’s another important message here. The less you pay attention to the financial media and economic or market forecasts (since they can cause you to imagine pain), the more successful an investor you are likely to be. With the upcoming U.S. elections, this reminder could not come at a more important time.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.

http://www.etf.com/sections/index-investor-corner/swedroe-looking-your-portfolio-hurts-returns?nopaging=1