Society has an activity addiction. We constantly need to be entertained. So much so that the average human attention span is only 8.25 seconds – down from 12 seconds a decade ago and almost an entire second less than a goldfish’s, according to Statistic Brain. Undoubtedly, millennials bring this average down a bit. 77% of people aged 18-25 said if nothing is occupying their attention, they will grab their phone, compared to only 10% of those over age 65. Begrudgingly, I can attest to this. I’m currently working to complete my MBA degree through Ohio University, which is rewarding but includes a lot of paper writing. Although I’m thriving, I’ll admit if I had a nickel for every time I checked my phone, answered a text message or opened an off-topic internet tab instead of focusing on a paper, I wouldn’t need to earn my MBA…I’d just buy one.
*stops writing this post to research the going price for MBA degree*
Obviously I can’t actually buy a graduate degree and as easy as it is to joke about the fact that many of us can’t pay attention anymore, this notion made think (impressively, for more than 8 seconds) about how investors are affected by short attention spans. This mindset makes investors hypersensitive to trading frequency (“Why didn’t my investment adviser buy anything today!?”) and short-term price movements (“She bought that for me last week, why is it already down -1%!?”). This mentality can cause investors to “act just to act,” or worse, act solely on short-term volatility.
Successful investing is usually boring…and in a world where our short attention spans can cause us to “act just to act,” it is also very hard. Typically, successful investment managers buy a stock and hold it for a long period, often years. While opportunities, such as profit-taking, often present themselves to portfolio managers, this long-term outlook can result in lengthy spans of time with few transactions occurring in the portfolio. Successful investing does not look like what you see on television every day; long-term investors aren’t buyers of a stock on Monday and sellers of the stock Tuesday. This type of activity is referred to as Day Trading and is rarely successful over long periods of time.
My most sophisticated clients understand low portfolio turnover, or long investment holding periods, does not mean the portfolio isn’t being managed and sometimes the best action is no action at all. This method does not result in huge capital gains overnight. It focuses on steady, incremental gains, which lead to strong average annual returns over the life of the portfolio – the Tortoise to the Day Trading Hare. These clients, who are also the most successful, resist the urge to act just to act that plagues so many investors, and in turn, make a lot of money.
Ideally, all investors would, or could, resist this tendency to act. But I’m more of a realist, and understand that is just not going to happen all the time. What we can do, is get a little better. Here’s how:
- Talk to your adviser. You may not see trade activity every day, but your portfolio is being managed. There is a lot going on behind the scenes! And if your adviser is anything like me, or is me, he/she wants to discuss it with you. Don’t be afraid to ask what they’ve been doing in your portfolio if you start to feel stagnant.
- Tune out the noise. We live in the era of the 24-hour news cycle (have to cater to those pesky short attention spans, after all). Investors have immediate, easy access to price movements of the markets, which often leads to investors taking action based on one day’s worth of news. By all means, be an informed investor and keep up with your holdings, but realize one day is just that, one day. A single-day price movement, in either direction, won’t tell you anything about the long-term success of the holding. If you find yourself panicking over one news headline, starting to check in monthly, or even quarterly, on your holdings may help.
- Open a play account. If all else fails, give in to that urge to act…but don’t let it derail your financial goals. Open a small side account (Fringe Account, Play Funds, Mad Money…whatever you want to call it) to self-manage. You can trade on any news, any price swing, any frequency that you desire. You might make money…you might not. However, with the large majority of your portfolio still invested as planned by you and your adviser, your portfolio is still able to help you meet your financial goals, regardless of how your side account performs.