How Myopic Loss Aversion and Index Comparison Can Become Investor Traps

Investors can often find themselves in the trap of comparison. The market goes up, investors tend to look at their portfolios. The market goes down, even more investors tend to look up their portfolio, a number of which make knee-jerk financial decisions. This is often driven by myopic loss aversion. Traditionally, investors who look at their portfolios more frequently tend to earn less money over time. (New York Times, Dec. 2013) Think of the stock market like cooking steak: if you’re looking, it’s not cooking. You’re often better letting the steak sizzle for the right amount of time.

One of the most common sentiments we hear at American Portfolios Denver is, “As long as my portfolio beats the market, I’ll be fine.” To be clear, comparing your portfolio performance versus the index benchmark can be a source of good information for you and your financial advisor to discuss.

However, you need know you’re comparing your portfolio performance to the appropriate benchmark. What if you were to compare an apple to a banana? There are few similarities between an apple and a banana beyond both are classified as ‘fruit’. In the same way, comparing your portfolio’s performance against the wrong index benchmark gives inaccurate data.

Instead of asking how your investments are comparing to the index benchmark, the better question is, “How are your investments doing compared to your financial goals?” Determining success versus your goals is more controllable than performance versus the market. It also means taking more personal responsibility for your investing success. First, have you identified your future financial goals with your certified financial planner? Are you and your advisor doing what’s necessary meet your financial goals in the future? Is your portfolio getting you where you need to go?

If you haven’t answered these questions with a financial advisor, now is the time. Our American Portfolios Denver team works with investors to create a detailed roadmap to guide their investments into the future. We help investors understand and recognize the dangers of myopic loss aversion and index comparison by relying on evidence-based investing decisions. Start a conversation with our team today.