Data is everywhere – flowing through your phone, across your desktop, and even streamed beneath your favourite TV show. Thanks to mobile apps, anyone from an amateur investor to a seasoned pro can tap into data to monitor their investment portfolio in real time.
You may think that having data at your fingertips is a good thing. In some cases, however, it can harm your financial outlook. This is because frequently checking the status of your investments reduces your desire to seek risk – a necessary component of investing.
Often equated to gambling, investing involves taking a certain amount of risk in hopes of receiving a larger future gain.
Many investment portfolios and retirement funds automatically balance “safer” risks, such as bonds, with riskier investments like stocks for you to achieve the perfect balance. Convenient, right? These combinations are, in fact, a great place to start out because they reduce the risk of your whole portfolio tanking because one company performs poorly.
People often say that investing is a “long play”. Investing has earned this description since returns on market investments have a higher chance of rising over an extended period of time. While a single stock may not change much value-wise day to day, portfolios that take calculated risks over time generally provide higher rates of return.
Don’t fear the market
Reporters often talk about the movement of the markets – up or down depending on when you tune in. Don’t fear the small dips in daily performance. Being overly cautious about your financial choices because you fear a small drop in your investment is not healthy for your financial future.
Focusing heavily on these changes – for example, obsessively checking your performance, even when the markets are closed – if the market is down can instill a terrible fear of the calculated risks necessary to grow your portfolio.
This avoidance of risk when exposed to an excess of data has been dubbed "myopic loss aversion", by famous behavioural economist Richard Thaler.
In an experiment by Thaler’s team, one group of investors were shown more market performance data than another that saw very little.
Those with access to the most data took the least risk in growing their investment portfolio for the future. And as a result their profits shrank: they made less money than everyone else in the experiment.
You might think having more data available on your finances has to be a good thing. However, Thaler and his colleagues proved that too much data can actually be harmful.
Here’s how to avoid trouble
If you want to step away from the distraction presented by large amounts of financial data, mark a date on your calendar about once every three to six months to revisit investment plans.
Checking in less often, instead of daily or weekly, will help you assess how your portfolio does over time.
Data can be totally addictive, especially when it’s readily available via your mobile phone or on social media. So try removing apps from your phone or moving investing-related apps behind others. This should make your performance data harder to reach as often. They’ll still be available when you really need them.
Another tip: read articles that focus on the broader state of the economy – not specific investing-focused ones. Taking a broader view can reduce the chance of myopic loss aversion. Separating yourself from share market performance data can improve your ability to think clearly and make better decisions.
Checking how much money is left in your wallet before payday is no fun. Neither is reviewing your investment portfolio every day.
Instead, take a break from the data and focus on the life around you. Markets can be scary enough.