Watching Your Money: Tips On How To Monitor Your Investments

BY JIM McELROY, CFA

How often should you monitor your investment accounts? Like so many other things in life, the answer to this question is, “It depends.” It depends on your investment horizon, or when you will need to convert your investments to cash. It depends on your risk tolerance, or how comfortable you are with not meeting a targeted value at the end of your investment horizon. It depends on how diversified your investments are. It depends on how disciplined you are at avoiding decisions based on emotion. And all of these “depends” depend upon each other.

A long investment horizon favors growth investments over income investments and allows time for portfolios to recover from short-term declines. The longer the horizon, the heavier your portfolio should be weighted towards growth, or equity, investments.

Why Being “Hands Off” Can Be A Good Strategy

Such portfolios often benefit – yes, benefit – from a certain level of neglect. Employing a buy-and-hold strategy for a well-diversified portfolio of stocks sounds naive, but it’s a strategy that has a long history of success. As long as your investment horizon is 10 years or longer and your investments are well diversified, a quarterly or even annual monitoring of your portfolio may be all that is needed. As the horizon shortens over time, more frequent reviews of holdings (perhaps quarterly or even monthly) may be warranted, primarily for the purpose of reducing the volatility of the portfolio by selling stocks and increasing intermediate-term bonds and cash. A truly short investment horizon portfolio – one that is invested in cash and intermediate- to-short-term government bonds – need only be monitored for the purpose of reinvesting the proceeds from maturing bonds and ensuring that the merits of selected vehicles remain sound.

Very few investors are stoics, particularly when they see losses in their investment portfolios.  It’s hard to be disciplined when it’s your money, but discipline is one of the primary characteristics of successful investors. If you’re disciplined, frequent monitoring of your portfolio has no downside. For most of the rest of us mortals, however, repeated monitoring of investments opens the door to churning – churning of the stomach at best or churning of the portfolio at worst.

Avoid the Temptation To Constantly Check On Your Investments

The more frequently you look at your investments, the more likely you are to see losses. A recent study indicates that for a portfolio comprised of 60 percent equities and 40 percent bonds, the probability of returns being negative is 46 percent for daily returns, 36 percent for monthly returns, 33 percent for quarterly returns and 26 percent for annual returns.

Having the discipline to avoid checking your investments is critical. It’s highly unlikely you will gain an edge or discover a market anomaly that will tell you when to buy or sell: the market is much too efficient to allow for such opportunities. So do yourself a favor and stop looking at how much is in your investment account every day.

Investment portfolios that lack diversity, however, are a special case. When a portfolio holds only one or two equity securities – either because of a low cost basis, sentimental attachment or speculative motives – the frequency of monitoring usually depends on the proximity of a cell phone with a quote app. Daily, if not hourly, monitoring is generally the rule. While we don’t advocate non-diversified portfolios, we acknowledge they exist, even for risk averse investors. For everyone but risk tolerant speculators, we recommend frequent reviews of non-diversified holdings with the aim of executing regular sales and reinvesting in diversified portfolios.

Whether your goal is to save enough to retire comfortably or fund you children’s college education, monitoring your investments requires setting a plan and sticking to it. Don’t let watching the daily ebb and flow of the stock market sidetrack you from achieving your investment goals.