The Information Age has changed our lives. It has never been easier to access information. Good things have come from this technology: connecting with friends across the globe, communicating with colleagues more efficiently, learning about unusual subjects.
But there's a downside, too: this instant access to information can undoubtedly affect our thoughts and behavior, even when it comes to our investments.
It can be hard to resist the temptation to check market and investment performance daily (or more often) when the information is at our fingertips. It can be particularly challenging to refrain during a period of volatility, like this past quarter, when messages about market ups and downs bombard us from all angles — the media, our inboxes, even friends and colleagues. Constantly watching and hearing about market volatility can cause anxiety even in the most disciplined investors, potentially affecting how we think or act.
Research1 has shown that some investors become more sensitive to losses than to gains when they evaluate their portfolios frequently. This effect is called myopic loss aversion, and investors who display it take a short-term view because they interpret investments to be risky.
The same research indicates that when those investors checked performance less often, they were willing to accept more risk. The conclusion: When people view market performance more frequently, they may perceive investing to be riskier. This, in turn, could cause them to worry and want to take action — potentially making changes to their portfolio that don’t necessarily correspond with their goals.
Consider myopic loss aversion from another perspective: the other kinds of investments we make. When we purchase a car or a house, we often consider the value of those items before we buy them. But no one has an appraisal done on their house every week to determine whether its value has changed, nor do they check the Kelley Blue Book value of their car every day. If they did, it could seriously affect their feelings about the choices they made and potentially cause them to make rash decisions about those investments.
Instead of being blinded by myopic loss aversion and focusing on what your investments are doing today, readjust your view to down the road. Tune out the ever-present distractions of the Information Age — and perhaps even the advice of family and friends — that may tell you to do something in response to volatility. Instead, focus on what really matters.
Interested in discussing your future goals? Dopkins Wealth can help you design or modify your plan to help you realize them. You are invited to contact your Dopkins Wealth Advisor or me to continue the conversation.
- “The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test,” The Quarterly Journal of Economics (1997)