It’s never been easier to check in on your investment portfolio, so you might imagine that a Nobel laureate in economics would keep a close eye on his.Not Daniel Kahneman, winner of the 2002 prize and author of Thinking: Fast and Slow. “I don’t look at my investments very often or not at all,” he recently told Bloomberg. “Checking them too often is not good.”A recent analysis of data from investors who track their portfolios with SigFig agrees: Checking your portfolio more often is correlated with lower investments returns.The median investor in our dataset checks her portfolio eight times per month. We also looked at frequent checkers — those who check 30 times a month, or about once a day — and those who check 60 times a month, or twice a day. (Actually, we even have some real obsessives who check a dozen times a day.)The results: Investors who check their portfolios every day earned an average 0.2 percentage points less over the last year than the median-frequency checkers. The twice-a-day crowd earned 0.4 percentage points less.That doesn’t sound like much, but over the long term, a 0.4% annual lag adds up. On a $30,000 investment at 6% per year, giving up 0.4% annually means a loss of about $18,000 over 30 years.We can’t be 100% sure what accounts for the difference, but we have a few hypotheses. Obviously, looking at your portfolio more often doesn’t cause it to shrink, like you have the evil eye or something. But it’s possible that some of those frequent checkers are trading more often and paying more in trading fees. Or they’re more prone to panicky investment decisions. Or maybe they’re retired and have more time to sit at their computer, looking at their money – though even when we break investors into age brackets, the correlation remains.
What’s wrong with a little peek, anyway?
Checking your portfolio too often is a problem for three closely related reasons:
- It’s depressing. Psychologists like Kahneman have demonstrated over and over that the pain of loss is more intense than the pleasure of an equal gain. All investments fluctuate, and if you have a well-diversified portfolio, some part of it may do poorly. On any given day, your portfolio has some way to make you miserable, even if it’s doing well in the long term.
- It’s unnecessary. A diversified portfolio of index funds or ETFs benefits from regular feeding (such as automatic deposits) and occasional (see below!) rebalancing. That’s it. It doesn’t require daily tending, trading, or fudging.
- It leads to bad decisions. Look at your portfolio enough times and you start to think, Hmm, I could probably improve this. Or worse, I’ve been losing money for the last two months! Sell! Emotional decisions can decimate a portfolio.
Once your portfolio is properly diversified, fees minimized and auto-deposit set up, you may want to check in occasionally to re-evaluate and rebalance your allocations. (If you bought a target-date fund, you don’t even need to do that!) How often? There’s no right answer for everyone, but in general you may want to check up on your investments once a quarter or every six months. Think of it this way: Check in about as often as you visit your dentist — not as often as you use your toothbrush.
Data note: in the graphic, we use the slope of a best-fit line between daily user sessions and their 12-month returns (net of fees). That slope has a p-value less than 0.05. Please note this measures the strength of a correlation, and does not imply causation.
Alibaba (BABA) goes public Friday in what will likely be the largest U.S.-listed IPO ever. The media hype is undeniable. Should you give in?We looked at a few of the most hyped-up IPOs of the past four years and found that investors buying on the first day of trading pay, on average, more than the IPO’s offering price at market open. And that “premium” eats into potential gains.Since its 2011 IPO, for example, LinkedIn (LNKD) shares are up more than 360% (as of September 16, 2014) — yet IPO investors who track their accounts with SigFig have an average 67% unrealized gains.Here’s what investors should know about IPOs before they jump on the next big one:
The first-day premium
The average first-day pop – or price spike – for an IPO this year is 14%. Last year it was 17%. Historically, it has been 10%.These one-day returns sound amazing. But as our data shows, everyday investors typically don’t enjoy them. Why? Institutional traders get in earlier, at preferred pricing. IPO shares get pre-allocated to institutions. Everyday investors have to wait till the opening bell. When the shares are available to the public, the price reflects the actions of the institutional investors.On the first day of the stock’s trading, retail investors paid an average premium of 26% to get into GoPro (GPRO) on the first day of trading, 71% to buy Twitter (TWTR), and 115% to own LinkedIn.There are, of course, exceptions. Facebook (FB) investors only paid a 5% premium to purchase price as the underwriters boosted the initial share price three days before the IPO and Facebook released 25% more shares to meet the huge demand. A premium was baked into the price before the opening bell. The market was flooded with overvalued shares. When the stock didn’t get a pop and some negative reports on FB came out, the stock took a long slide. Of course, if you stuck it out you’d be pretty glad now.And there are the outright flops. Zynga (ZNGA) investors paid an average $10.06 to go in on the company’s December 16, 2011 IPO, barely above the initial offering price of $10. Today, the stock trades right around $3.
A turbulent ride
The months following IPOs are notoriously shaky as big institutional investors flip shares, and employees and early investors sell out after the end of the customary six-month “lock-up” period.Last May, as Twitter’s lockup period expired, insiders dumped shares causing a 17.8% one-day drop to $31.85: well below the average investor’s purchase price of $44.50 on IPO day.
Selling early — or holding on for too long?
Parsing through SigFig data, we found that many investors sell their IPO stocks within months of buying. Some 73% of GoPro investors (the company IPO’d less than 3 months ago and is up 180% since then) have already sold at least some of their GPRO shares.Yet 61% of MediWound (MDWD) IPO investors seem to be hanging onto their stock, despite its 41% drop since its IPO in March 2014.
Warren Buffett himself has said that IPOs are almost always bad investments because of the hype involved. Research suggests that in the long run IPO companies underperform comparable companies. If you do want to play the IPO game, keep in mind that just like investing in any individual stock, you’re taking a risk on a single company.As usual, one caveat about our data: it represents the activity of investors who track their portfolios on SigFig. They may not be representative on investors as a whole.
We hear a lot about the financial hard times and bad behavior of young people. They’re saddled with student loans, can’t get a job, and live in their parents’ basements.Maybe so. But what about those under-35 Millennials who are able to save for retirement? How do they invest? Are they day-trading speculators, the investing equivalent of Fast & Furious street racers?Nope. According to our data (based on accounts currently synced with SigFig.com) Millennial investors are better-behaved than their elders on a variety of measures.
Keeping it cheap and easy
Let’s start with one of our favorite subjects: fees. Fee-heavy investments silently take not-so-dainty bites off your nest egg over time.Millennials tend to select lower-cost investments. Twenty-somethings pay an average of 0.39% in fund fees. (Which is still high, by the way – you could construct a well diversified low-cost portfolio paying just 0.15% in fund fees*.) Older investors pay up to 50% more: investors in their sixties pay 0.58%.Older investors pay more, in part, because they own more bonds, and bond funds have, on average, higher expense ratios than stock funds. But since you can get a bond index fund for 0.10% or less, that can’t explain the whole difference.
Fewer trades, higher returns
Young investors also trade much less than older ones. The median user in her 20s makes 23 trades per year. Investors age 60–69 trade more than twice as often: 52 times per year.Why does this matter? More trading is strongly associated with lower returns.
Picking good funds
A couple of weeks ago we looked at the most popular securities by age group. A “security” here can refer to an individual stock or bond, a mutual fund, or an ETF.Among under-30 investors, the most popular security is Apple (AAPL) – a favorite among almost all age groups. The rest of the top five, however, are all low-cost index ETFs: a total US stock market fund, two international funds, and a bond fund.There is only one fund in the top five securities held by investors in their 40s. For investors in their 50s, there are none.What if we look only at the most popular funds and ignore individual stocks? A similar story: older investors are more likely to own expensive, actively managed funds. Over time, those costs add up.
The smart kids
Like we said up top, only young people who actually have an investment portfolio are going to sync it with SigFig. So we may be seeing more of the honor students.But the same reasoning applies to every other age group. Young people really do appear to be better investors.Now, if we could just get them to move out of our basements.
Everybody likes rooting for the home team and glaring at the fans wearing the visitor’s cap. And if you’re talking baseball, we’re with you. In investing, however, sticking with your home team—or home country—is a risky move.Here’s why:
The world of investing
Nations have different regulatory environments. Some specialize in particular sets of industries. Some are in the midst of massive economic growth, and others are in crisis. All of these factors affect the companies operating in those countries, and the stock exchanges those companies trade on.In other words, you can think of international stock markets as being like companies: some go up, some go down. And like individual companies, countries (and their stock exchanges) can also go bust — or flourish. Stock markets can go to zero (usually due to war) or crash and stay low for decades — or they could outperform. Owning a healthy mix, also known as diversification, can lower the risk of a portfolio. This isn’t just an academic argument: Vanguard reported in a February 2014 white paper that international investing really did reduce a portfolio’s volatility. (Incidentally, they also considered the question of whether investing in multinational corporations headquartered in the US provided similar diversification. It didn’t.)
What’s in your portfolio?
The US accounts for a little over 35% of the global stock market, and advisors typically recommend American investors make at least 20% of their stock holdings international. Note that this is percentage of stock holdings — not an investor’s portfolio as a whole. Depending on risk appetite and investment horizon, that translates to, roughly speaking, between 15% and 65% of one’s overall portfolio.Are regular investors heeding this conventional wisdom, though?The median SigFig user has 3% of their portfolio in international stocks; 4% of their stock allocation.
The Equity Home Bias Puzzle
Why are so many investors skipping international diversification? It’s a phenomenon known as the equity home bias puzzle. To put it simply, people prefer to keep their investments close to home.According to the Investment Company Institute, 27% of the money invested in equity mutual funds in the US is in international stock funds. That’s much closer to Vanguard’s recommendation, at least – but the figure is probably exaggerated by including institutional money like pension funds, hedge funds, and endowments.Maybe our users are holding international stocks in a portion of their portfolio not synced with SigFig (such as a pension fund). Maybe they just love rooting for the home team.
Let’s say you have a dozen eggs and a variety of baskets…Okay, you see where we’re going with this. Diversification can, to mix farmyard metaphors, save your bacon. Investors who put a big chunk of their money into a single stock exhibit a fragrant mix of hubris and amnesia. Stocks of individual companies—even big, seemingly unsinkable ones—can and do go to zero. Goodbye, Enron! Sayonara, Washington Mutual!The US stock market as a whole is far more resilient: despite plenty of terrifying plunges, it hasn’t gone out of business once in centuries.Plenty of investors, however, aren’t getting the message. The average SigFig user holds 15% of their portfolio in a single stock. One in four users holds more than 23% of their portfolio in a single stock. That’s a big pile of unnecessary risk.These investors may have a semi-good reason to hold a big chunk of stock—namely, that they work for the company whose stock they’re holding, are participating in an employee stock discount program, and are not allowed to sell the stock yet.That’s not a great reason, since employer stock is the most dangerous stock you can own: your salary is already tied to your employer’s fortunes; why throw your savings into the mix, too? Yet, as long as you’re unloading the employer stock as quickly as you reasonably can, it makes sense to participate.But what about the 15% of users who have more than 50% of their portfolio in just two stocks? Perhaps these investors have gotten lucky, picking hot stocks that have now elbowed aside less exciting parts of the portfolio. Or they’ve worked at both companies whose stock they own and haven’t rebalanced yet. One caveat to all this: we can’t be sure that these users are syncing their entire portfolios with SigFig. Perhaps we can only see the jagged tip of a more diversified iceberg. But any portfolio with a giant investment in one or two stocks could be improved by trading in some or all of them for a diversified index fund or ETF — or another boring investment less likely to blow a hole in your savings.
nullWant to hire someone to manage your money? It sounds appealing, if you can afford it: pay a professional to worry about which stocks and mutual funds to buy and when to get in and out of the market. We don’t pull our own teeth; why manage our own investments?But does it work?At SigFig, we recently analyzed data from our users, about 5% of whom pay an annual investment management fee to an advisor. The rest don’t; they might use an hourly or commission-paid advisor, but they don’t have their accounts directly managed.
Do advisors earn their keep?
The first thing that jumped out when we reviewed the data was that portfolios with managed accounts had higher balances. No surprise there: managed accounts tend to have a $100,000 minimum, or higher. Users who have these accounts are generally older and wealthier. And on average, they are paying more than $7,400 annually in management fees.If you can afford to lay down this type of cash and it’s rewarded with higher performance, that’s great. And managed accounts showed some admirable characteristics: they’re more diversified (i.e. less risky) and hold less cash (i.e. they are losing less to inflation over the long term).But the typical managed portfolio pays more than 0.8% in management fees – that’s $4,000 on a $500,000 account a year. Managed portfolios also pay over 50% higher mutual fund fees than non-managed accounts. And even though you can build an excellent, globally diversified portfolio using two or three low-cost index funds (while paying fund fees at 0.2% or better), the typical managed portfolio holds nearly thirty securities.Money managers certainly stay busy: annual portfolio turnover for managed accounts was 26%; for non-managed accounts, 11%. Trading a lot is called “portfolio churn,” and it’s associated with lower performance.Speaking of performance, we found no difference over the last year between users with managed and non-managed portfolios: both did pretty well. How is that possible, if the fees were so much higher for managed accounts? Partly because managed accounts tend to be held by older investors who hold more dividend stocks, or perhaps their managers picked dividend stocks on the hunch that they’d do well — and they have.However, that’s not the whole story. Because users with managed accounts are much wealthier than those without, we built a dataset of comparably well-off users who manage their own investments.And how do those portfolios look next to managed portfolios? Comparable performance, similar mix of investments, lower churn, lower fees.
Don’t take our word for it
If you’re skeptical of our results, we were too. But a 2011 paper by Andreas Hackethal of Goethe University Frankfurt investigated a similar dataset of German investors and came to the same conclusion:
“Involvement of financial advisors is found to lower portfolio returns net of direct cost, to worsen risk-return profiles…and to increase account turnover….”
We want investment advisors to be like dentists: experts at a rare and valuable skill. The problem: Dentists are really good at cleaning and pulling teeth. The average investment manager, however, is as only as good at managing money as the average investor—maybe worse.
What advisors can do
Financial advisors do a lot more than manage investments. They advise on saving and budgeting, estate and tax planning, major purchases and life transitions. They’re psychiatrists and marriage counselors.What advisors can’t do is consistently beat the market after costs, because none of us can. This means smart investors have two options:
- Manage your own money (perhaps using an online tool) and hire an hourly planner for advice as needed.
- Hire a manager that charges a low annual fee to manage a portfolio of index funds or ETFs.
On average, human advisors charge high fees. Occasionally, they outperform after costs — but it’s hard to tell beforehand if you’re choosing a good one. Advisors sell you on past performance, which isn’t a valid indication of future results.So, don’t overpay — especially when you have significantly less expensive investment management options.