Obsessive Portfolio Watchers Beware

Our last quick poll topic asked how often you watch your investment portfolio. The answer? Our readers like to check their portfolios obsessively.

When asked "How often do you review your investment portfolio," more than 85% of the 238 people who took the survey said "constantly." The next largest response -- a quite small 5% -- responded that they watched it "quarterly."

Here are the complete returns:

My first reaction to this result was surprise, as I did not expect such lopsided results and so many rabid portfolio watchers. But the more I thought about it, it makes sense. Readers of this site watch "constantly" because they are concerned about money, and now we live in a world of ubiquitous online access and real-time data. Many people are checking their investment portfolios on their iPhones while they wait in the doctor's office.

Does watching help? If you are not a professional trader, I don't think so. There is a growing body of research that shows that over-trading can diminish returns. My experience over two decades of trading and investing is that some of my best-performing portfolios were the least watched, because it forced me to take a long-term view of things and "invest" in the best companies rather than "trade."

Of course, watching is different than trading. But it seems to me that investors who more obsessively watch their portfolios are going to be more inclined to take action -- and over-trade.

Why might this be? Markets can be quite volatile, and the knee-jerk emotional response is often the worst. Extreme examples of this are how everybody wanted to buy tech stocks in 1999 near a major market top, and everybody wanted to sell high-quality blue-chips in March 2009, near the market bottom. Making decisions with the crowd during extreme times can cost you.

While my own experience is that over-trading can lead to bad results, there is also growing data that backs this up. A study by Hulbert Financial Digest, as well as a study by two professors at the University of California, indicates that investors tend to sell winners too early -- and over-trade.

The Hulbert Financial Digest research found that 500 model portfolios tracked in 2010 gained an average of 14.6%. That's not bad, compared with the 12.8% gain in the S&P 500 in 2010. However, if those model portfolios had been frozen at the beginning of 2010 with no transactions allowed, the resulting gain would have been 18%.

The University of California study, by finance professors Terrance Odean of the University of California Berkeley and Brad Barber of the University of California Davis, was "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors." It found that stocks that were sold in short-term transactions (under 30 days) performed 3.2% better than the stocks that were bought. Investors would have been better off had they done nothing.

So if you find that you are checking your portfolio often, think about your long-term strategy and try to keep those emotions in check and avoid over-trading. And if you're nervous about the market collapsing? That's what stop-loss orders are for.