The yo-yo and the escalator: where to look?
A young colleague recently asked me what had been the biggest technological development of my professional life.
Aside from the disturbing realization that this clearly means that I am considered old, I thought it was a fascinating question.
After an internal debate on the Internet against the smart phone, I switched to the smart phone. Immediate access to a universe of information, location data and of course global communication, all in the palm of your hand; something straight out of the original Star Trek series.
This question got me thinking about the value of immediate access to information – when it is useful and when it can be unnecessary.
With fixed rate investment returns currently at their lowest level in 30 years, many models that guide the design of investment portfolios have been reweighted in favor of higher risk assets.
They now include a higher allocation to more volatile equity investments in an attempt to offset the lower returns generated by the fixed interest portion of the portfolio. As a result, the volatility that investors are likely to experience in pursuing the desired return will be higher than in the past.
Now enter the smart phone, with an app that allows you to check the value of your wallet when you wait for your morning coffee.
The convenience of the smartphone means that we often end up checking our phone just because we can, rather than when we need it.
Make no mistake, being able to access up-to-date information about the holdings in your wallet (or KiwiSaver account) is an important feature, but for me it depends on how often it is healthy to check it.
I invented a name for the condition of constantly checking the value of your wallet: yo-yo myopia.
The disturbing feature of this condition is that the patient is completely distracted by the daily movements of his wallet and forgets the important fact that he is on an escalator.
By this I mean that even though the value of an investment will go up and down (much like a yo-yo) over time, the underlying value of the collective portfolio will increase. Much like when you’re on an escalator, it’s easy to forget you’re going up – you’re at your destination before you know it.
The problem with yo-yo myopia is not only that it creates unnecessary stress for the investor, but it runs the risk of investors sabotaging their own goals. This can happen if the investor is afraid to exit the market (i.e. stepping away from the escalator) or becomes too conservative in their asset allocation in an effort to reduce volatility. yo-yo.
Studies have shown that investors working with an advisor can enjoy a return of up to 3% per year higher than that of DIY investors. Some of this extra performance is due to smarter investment choices, but the majority of the improved performance can be attributed to two factors: helping the client maintain the right asset allocation for their age, stage and profile. risk, and stay invested (and continue to invest) when markets are volatile.
After reading this you can now see why yo-yo nearsightedness worries me. With the best of intentions, providing too much information may inadvertently work against some investors, highlighting the degree of volatility and encouraging a short-term view rather than looking at the big picture. My recommendation would be not to abuse the app; maybe a check once a month might be enough.
Volatility is the price we pay for higher returns, especially in today’s environment. Remember, if your wallet is properly structured, the escalator will eventually do its job.
– Peter Ashworth is a director of New Zealand Funds Management Ltd and a financial advisor based in Dunedin. The opinions expressed in this column are his own and not necessarily those of his employer. Its disclosure statements are available on request and free of charge.