In the previous article behaviours of “not-so-great” investors are outlined. There is however, hope, as also some advice is given as well. One of these advices was to sit back and relax. This to most people, is the exact opposite of how they manage their finances.
As soon as a new year starts, most people refresh their mindsets when it comes to money. We aim to spend less and save more, each year, over and over again. If you are more advanced when it comes to finance, you use the new year to review your stock portfolio. In with the winners, and out with the losers, optimising your money. Now this is all good, but I got an even better tip for you in line with sitting back and relaxing: don’t check your finances too often!
What happens if you check your finances too often? You tend to focus too much on the short-term. Let’s look at the stock market first. If you check your stocks and their performance quite regularly, you will see them fluctuate. This makes sense. As stocks work on a continuous demand/supply valuation basis, their value can move massively. If you look at this trend over a week, the stock can look unstable. If you look at these movements over longer-terms, such as several months or even years, the direction of their development becomes clearer. Stocks with lots of peaks and troughs when looking at short-term developments, can show general up- or downward trends that are quite stable. It is from these long-term trends that one should decide whether to maintain or sell the stock. So the less often you check your finances, the less prone you’ll be to succumbing to the short-term fluctuations and the better you’ll be able to focus on spotting the general trend.
Another issue somewhat related is the equity puzzle: losers get sold too late, and winners get sold too quickly. Now why is this? It is a similar mechanism as the one described above. Due to checking your stocks too often, you might have a skewed vision of the actual overall performance of your stock. But more importantly in this case, every single perceived loss (the current stock price has fallen below the price at the time of purchase) is felt intensely. Because we are judging to our own reference point (price of purchase), all our perceptions are relative. Every single gain (the current stock price has risen above the price at the time of purchase) is felt as well, but due to what is known as loss-aversion, gains are felt less compared to losses.
The more often we look at our finances, the more we are exposed to these “losses and gains.” As such, this exposure drives us to make the decision to maintain or sell. We don’t want to make a loss, so we hold onto the losers. We want to make a net profit, so we already sell the stocks that have gained. We end up selling stocks that could have “gained” much more rather early, whereas we keep the ones that have made losses, and very often continue to make a loss. The degree of gain/loss could even have been exaggerated as we focus too much on the short-term.
So when it comes to the stock market. Set deadlines for when you want to check it. Check it once per year, look at which stocks have had an overall increase or decrease, which stocks are stable or unstable, and decide from there. If you want too check your stocks more frequently, have at it. But be aware that there is such a thing as checking your finances too often.
Given that this is so prominent within the stock market, is there an optimum for checking personal finances as well? Can your own income and expenses be optimised by looking at them x number of times?
When I tracked my expenses, because I was living on a very set budget, I checked my account every day, sometimes multiple times per day. It became an obsession. Now this is pretty much exacerbating what is known as the pain of paying. I “hurt” once I spent the money, and I “hurt” again, when looking at the losses (expenditures, negative numbers) on my bank statement.
This hurt might actually curb your spending, but it is also possible that you will develop an aversion against your own bank account, against your friends who keep inviting you to go out (often costs money!), and mainly against yourself for having put yourself in this position. This often goes paired with lots of self-pity and a bottle of wine you can’t afford.
The above scenario does not sound healthy. When it comes to personal finance there are some rather undefined lines between reckless, clueless, normal, in control and obsessed. If you are constantly in overdraft, you might want to read some of my other articles on spending less and saving, If you are never in overdraft, but constantly checking your bank statement and still hating yourself and your perceived lack of grip on your finances, you might just be masochistic, or what has been dubbed a “tightwad.” I’m not saying one is better than the other. But I am saying that both these attitudes are problematic, and you might want to seek out some advice on how to deal with the problems you are facing.
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