Yahoo Finance Why You Shouldn’t Check Your 401(k) Balance Too Often
Your 401(k) plan may very well be your largest investment outside of your home. As such, it’s only normal to feel the desire to check your balance often. But as most successful investors will tell you, it’s the long-term results of the stock market that matter, not the short-term fluctuations. In fact, watching your balances go up and down every hour or even every day can actually wreak havoc on your portfolio, as you’re more likely to make an emotional decision that you’ll regret.
Read: I’m a Financial Advisor: These 5 Index Funds Are All You Really Need
See: 6 Genius Things All Wealthy People Do With Their Money
Here are the reasons why you shouldn’t check your 401(k) balance too often, along with suggestions as to how you can “stay the course” and ride out your investment plan to long-term success.
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Overconfidence
If you check your 401(k) balance frequently and see that it’s continually rising, you might get sucked into making bad decisions due to overconfidence. If your portfolio was up 25% in 2023, for example, you might think that you’re an expert stock picker, as the S&P 500 index “only” returned 24%.
But as Scott Nations, an options trader and the author of a book about the psychology of investing, told the Wall Street Journal, “With the S&P up more than 20%, you don’t have to be that smart to have made a lot of money” in 2023.
In fact, it’s likely that the market itself did all of the heavy lifting in your portfolio, and you could have earned essentially the same return by buying a simple S&P 500 index and not looking at your account all year.
The real problem with this is that it may encourage you to take bigger risks, overlook important market indicators and/or make foolishly confident decisions going forward. As the Wall Street Journal reported, this is actually a physiological response created by the dopamine released when you see big gains in your account. According to the Journal, scientific studies have shown that this dopamine-induced overconfidence can lead to increased financial risk-taking, as you believe that you have “cracked the market” and can consistently outsmart it.
But as numerous other studies have shown, even professional investors have a terrible long-term track record at outperforming the market. One 2020 study even showed that nearly 90% of actively managed mutual funds failed to beat the market over a 15-year time period. If these market professionals, with all of the money and research behind them, can’t top the market, the deck is definitely stacked against individual traders — particularly those who are overconfident based on some level of short-term outperformance.
See: I’m a Self-Made Millionaire: 5 Stocks You Shouldn’t Sell
Distress
The other emotion that often afflicts investors who watch their 401(k) accounts too closely is despair. This is particularly true during corrections or bear markets. In those scenarios, it’s possible that your account balance will fall for many days in a row, never seeming to escape the downward spiral. This can generate a panic response in which you simply want to get out of your investments at all costs before you lose even more. But that type of thinking is usually a huge mistake.
As reported in the Wall Street Journal, behavioral economists Shlomo Benartzi and Richard Thaler found that observing market volatility likely made investors more scared of stocks. This resulted in lower returns among investors with long time horizons who followed the market more closely.
How To Combat the Emotions That Come From Checking Your 401(k) Balance Too Often
There’s simply no place for emotional decision-making when it comes to the stock market. Whether you end up buying more due to overconfidence when your account balance is high or emotionally sell what you have when your 401(k) value is down, it can cause significant harm to your portfolio. And you’re more likely to have an emotional response if you check your account too frequently.
So, what’s the best way to combat this? The first is to think of your 401(k) as a long-term investment, not a trading vehicle. Learn about historic market patterns and how they can work to your advantage. For example, for its entire history, the stock market has always gone on to make new highs after even the most vicious bear markets. Even better, research has shown that the stock market has never had a 20-year rolling period during which it has lost money.
This certainly argues the case that you should be buying when stocks are down, not emotionally selling out — and that you should have a long-term perspective. In fact, one of billionaire CEO Warren Buffett’s most famous quotes about the market is that you should “be fearful when others are greedy, and greedy when others are fearful.” According to the “Oracle of Omaha” himself, your investment moves should generally run counter to what your emotion tells you, by buying when everyone’s selling and selling when everyone’s buying.
The Bottom Line
Having a solid investment plan in place before you let your emotions take over is a good way to manage your account through both bull and bear markets. Resist the urge to check your 401(k) balance too often, as that can lead to an emotional response that runs counter to your long-term investment objectives and risk tolerance, both on the upside and on the downside.
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This article originally appeared on GOBankingRates.com: Why You Shouldn’t Check Your 401(k) Balance Too Often
