Another mistake:
The capital management gurus always have something to write about people who are into checking their portfolio on regular basis. According to them, making a routine of checking your profile on regular basis is not something that a wise investor would do.
The constant peeking in your portfolio is not good for your mental as well as financial health. According to different researches conducted on this certain behavior of the investors, the people who prefer to check the portfolios on regular basis usually end up under performing as compare to the one who check it once in a while.
There is no hard and fast rule about checking the portfolio every day. The only reason everyone advice against is that there is always a 50-50 chance when it comes to market going up or down.
According to the behavioural finance theory, people are more into fear of losing their money rather than the thrill of gaining something. This is the reason, people who check their profiles on regular basis, finds this entire process painful.
Seeing that the place where you wanted to invest your money might be going through little bit down, will affect your decision making. Checking portfolios on regular basis can cause you to panic and you might end up making decision in the spree of the moment, which is not always the best thing to do.
Now you might wonder what the solution to this problem is. Checking your profile less often than you already do?
Well, This Isn't Going To Change Much
We did our share of research on the history which goes back to 1871 and we can tell you that not checking portfolio isn't going to change things much.
For The Past 144 Years, According To The Probability:
- 39% of the investor who prefer to check their portfolios only one time during entire month might end up seeing market going down.
- Furthermore, checking portfolio once a year also comes with a 31% probability of them finding market in red.
Now you might wonder what the solution to this problem is. Checking your profile less often than you already do?
Not your fault!
The first thing that you need to do is understand the fact that you are just a simple human being and do not posses any superpower that will let you know when and how to make perfect decisions for your capital management.
Mental weakness has nothing to do with the loss aversion. It is in fact a biological phenomenon. According to a study that was published in Proceedings of the National Academy of Sciences, the loss aversion is basically determined by Amygdalae.
The Amygdalae are basically two parts of brain in an almond shape that is important for the limbic system. The limbic system is the part of brain that controls the emotional life of a person. According to the study, people whose Amygdalae is damaged are not loss averse.
Do You Need To Remove Your Amygdalae?
Different scholars of the evolutionary psychology believe in the fact that the reason everyone is here is all because of loss aversion. According to the McDermott, Fowler, and Smirnov, loss aversion basically became one of the most important parts of human almost 10,000 years ago.
Different scholars of the evolutionary psychology believe in the fact that the reason everyone is here is all because of loss aversion. According to the McDermott, Fowler, and Smirnov, loss aversion basically became one of the most important parts of human almost 10,000 years ago.
However, it is important for you to know what capital investment portfolio and lack of food aren't same things. The lack of food is basically an immediate problem while a small lose in your portfolio isn't an immediate problem.
Looking at total return, which includes dividends, since 1965 for the S&P 500; the average annualized return was 11.20%. But what really is interesting is how well stocks performed when compared to inflation.
Inflation decreases the value of your money and investments are only really profitable when they beat it on a consistent basis. Average annualized inflation-adjusted return for the S&P 500 over the same period was 6.96%. This means that $1 invested in 1965 would now be worth $15.16 when adjusted for inflation.
That number may sound underwhelming, but if you consider that as it discounts inflation, the multiplier of 15 gives the increase in your actual purchasing power. In Money terms, as annualized return for this period was 11.20%, $1 would have grown to $114.89.
So a portfolio of $10,000 that had been invested in the broad stock market in 1965 would now be worth $1,148,900. With this number, it is perhaps easier to appreciate the extent to which the stock market actually beat inflation. ( Read more at Long Term Investments )