By Shlomo Benartzi, Ph.D.
Professor, UCLA Anderson School of Management
Chief Behavioral Economist, Allianz Global Investors Center for Behavioral Finance
Obsessed with investment performance
We live in an age obsessed with investment performance. Plan sponsors hire and fire fund managers based on the returns they achieved in the last couple of years. Individuals, meanwhile, keep close track of how much money they make or lose in the market.
But the frequency with which people check their investments is a largely neglected variable of all this monitoring. Frequent monitoring can, in fact, have a large impact, influencing both how people feel about the market and their ensuing behavior-which is why we believe it's important that financial institutions "monitor the monitoring" done by their clients.
The current state of investment monitoring
In October 2015, the Allianz Global Investors Center for Behavioral Finance commissioned a survey of 1,050 adults with retirement savings accounts to find out how, and how often, they checked their portfolios. Not surprisingly, we found a wide variation in the method and frequency of monitoring. While 15% of respondents check once a year or less, roughly 20% check at least once a week. The most common frequency is quarterly, with 34.5% of people getting updates every few months.
So why does this matter? In the digital age, we have far more access to our financial information and are able to review our accounts-using all sorts of devices-at nearly any time. As a result, many investors are hyperaware and see every market bump, swing and correction, which can lead them to abandon their long-term investing plans. This phenomenon is known as "myopic loss aversion," and it results from a mismatch between the time horizon of an investment and the frequency of our account evaluations.
Daniel Kahneman, the Nobel Prize-winning psychologist, has a pithy description of human behavior that helps explain situations like this: What you see is all there is (WYSIATI). In the context of myopic loss aversion, WYSIATI can explain, at least in part, why people can be so influenced by hourly, daily or weekly losses, even if their retirements are decades away. Because losses are what they see, and losses loom larger than gains, losses assume a disproportionate weight in financial decision making. Instead of focusing on their ultimate goals, people continually recount their gains and losses, and so they seek to avoid the stock market.
Helping investors to focus on the long term
So what can be done about myopic loss aversion? Here are a few action items for helping plan participants and individual investors think longer term:
1. Monitor the monitoring
Financial advisors and plan sponsors would do well to measure how often people check on their portfolios, especially as new apps and digital displays are introduced. Consider the amount of time they spend on your site, or count the number of clicks within the app to differentiate between people who are mentally booking their gains and losses versus those who are engaging in superficial account glancing.
2. Reevaluate the glidepath
A mismatch between the risk preferences of investors and their portfolio allocations poses greater risk now than ever before, as short-term losses are more noticeable. We believe it is a valuable exercise for fiduciaries and investment committees to debate whether the glidepath should be adjusted to reflect the frequency of monitoring.
3. Foster longer-term thinking
One of the crucial tasks of financial advisors and plan sponsors is to help individuals focus on their long-term goals, even if they're monitoring their investments every hour on a smartphone. Effective communication can help foster longer-term thinking.
4. Make the responsible choice easier
It's never been easier for investors to monitor market performance. We should make more responsible actions, such as raising savings rates, just as easy. Ideally, the increased engagement triggered by constant account monitoring should actually be leveraged to encourage improved financial planning, and not investing paralysis.
More than a moment
In the 21st century, technology has transformed the ways in which investors get information about their retirement accounts. The task for financial advisors and plan sponsors is to ensure that the newfound convenience of mobile access doesn't lead to increased myopic loss aversion. Whenever possible, investors should be reminded of their true investment horizon. To paraphrase Kahneman, what they see at the moment is not all there is.
This article is adapted from a new white paper, "On Risks: The Neglected Variable Affecting Portfolio Choices in The 21st Century."
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.