“Over short time increment, one observes the variability of the portfolio, not the returns.”- Nassim Taleb
Mr Nassim Taleb in his book, Fooled by Randomness, gives an interesting example.
A 15% return with a 10% volatility per annum translates into a 93% probability of a success in any given year.
This means if you check your portfolio once a year, there is a 93% probability of seeing a positive result.
If you check the portfolio every day, then there is only 54% probability of seeing a positive result.
For one month, it is 67% and for one quarter it is 77%.
Seeing negative results in portfolio would trigger unpleasant emotions resulting in inappropriate action. That’s why most investors are unable to stay the course.
If you see your portfolio only once a year, the probability of negative results come down significantly. This would ensure that you’ve sufficient emotional strength to stay the course.
From 1979-80 to 2015-16; for the last 37 financial years; we had a 25 years of positive Sensex returns and 12 years of negative returns. So since 1979, the Indian stock market has produced an annual gain 68% of the time, or 25 times, while losing ground just 12 times.
So even in real life scenario, if you check the portfolio once a year, the probability of seeing a positive return is high.
So don’t check your portfolio frequently.
I’ve a confession to make. Due to the nature of profession, reading business papers, also as a habit, I do see the markets daily. So I also see our family portfolio once in a week. But I’ve not made any changes to our family’s mutual fund portfolio during the last few years. Even in our stock portfolio, there is just one change in this financial year. There are years there would be zero change in our portfolio. I’ve seen funds in my portfolio falling 30% in few days, but did not take any action whatsoever. Not that I don’t feel emotional pain, but I don’t act on the same. This is a trait I’ve developed over many years. Even if my net worth falls by 50% over a very short time, despite going through pain, I would still stay the course.
The best thing to do is not look at your portfolio frequently. If you still want to do, work on your emotions to ensure that you don’t react to the pain.
Emotional control is very difficult. Not seeing is easy.
Choose the easy path.