Why Doing This In The Stock Market Can Crush You Psychologically

A simple and seemingly innocuous thing that most stock market investors do is to check their portfolios each day. But here’s the thing: Checking our portfolios daily can crush us psychologically.

In his brilliant book on how people’s minds actually work, Thinking, Fast and Slow, Nobel Prize winner Daniel Kahneman writes:

“We concluded from many such observations that “losses loom larger than gains” and that people are loss averse.

You can measure the extent of your aversion to losses by asking yourself a question: What is the smallest gain that I need to balance an equal chance to loss $100? For many people the answer is about $200, twice as much as the loss. The “loss aversion ratio” has been estimated in several experiments and is usually in the range of 1.5 to 2.5”

As Kahneman explains, the pain from losses outweigh the pleasure from gains by up to 2.5 times.

This is important when it comes to the stock market and checking our portfolios daily. Take a look at the chart below which plots how often Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), has recorded a loss for different holding periods.

Straits Times Index's odds of making losses from May 1992 to January 2016
Source: S&P Global Market Intelligence; author’s calculations

A holding period of one day has historically seen the Straits Times Index suffer a loss 48% of the time. In other words, it’s a coin flip when it comes to stocks making a gain on a daily basis. Given how the pain of losing outweighs the pleasure of gains by around twice or more, checking our portfolio everyday can thus be psychologically bruising.

The good news is that the stock market’s odds of making a loss decline with time. So instead of tracking our portfolio on a daily basis, why not do it every quarter or six months?

In any case, the value of companies don’t change much day to day. The time saved from checking your stocks’ price movements each day can be channeled to more productive areas, such as studying businesses, taking a walk in the park, reading a book, or any other thing you fancy.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.