After sitting for too long, it is always a good idea to get up and stretch your muscles.
It is a natural human instinct to want to be active and do something rather than just sit for hours.
Plus, it is good for you.
However, the same cannot be said for investing.
Too much action can be bad for your financial health.
Some investors prefer to actively manage their portfolios to maximise their returns rather than purchasing passive exchange-traded funds.
There is nothing wrong with that.
However, an insidious psychological bias known as “action bias” can creep up, and cause you to be too active in managing your investment portfolio.
Action bias refers to the belief that it is better to take action rather than do nothing.
It is the tendency to feel that you need to do SOMETHING rather than sitting by passively.
However, such actions can end up being detrimental to your portfolio as action bias can lead to rash investment decisions that cause you to lose money.
Transacting too often
While trying to maximise your profits, you end up transacting much more than you should.
By doing so, you incur a ton of brokerage and commission charges that will erode your overall profits.
In addition, there is no evidence that buying and selling more often will result in a better outcome.
It is a fool’s errand to try to time the market and though many investors may believe they have the Midas Touch, the reality is that many fail to lock in consistent profits through active trading.
Instead, all you end up with is escalating brokerage fees and probable paper losses if you bought too high.
An example will be an investor who actively buys and sells the shares of DBS Group (SGX: D05).
Assuming he had bought the shares in October 2020 at around S$20, and then sold them for a tidy profit two months later at S$25, he would have to buy the shares back again at a higher price as the bank’s share price carried on climbing thereafter.
In frustration, he may have dived headlong into DBS at close to its all-time high of S$37 in February 2022, only to still suffer a paper loss with the bank trading at the S$33 level currently.
He would have been better served by just buying and holding on to his shares over the past three years while enjoying the rising dividends that the bank has declared during this time.
Many investors also feel that they need to take action when there is a sharp share price movement, either upwards or downwards.
Remember that the stock market is driven not just by earnings and corporate fundamentals, but also moves higher or lower based on sentiment and a flurry of economic news.
Oftentimes, share prices can be much more volatile than you expect, without any good reason to accompany such movements.
By looking at share prices frequently, you may feel the need to do something to rejig your portfolio.
Selling a gem too early or cutting loss on a stock that is going through a temporary rough patch will give you disappointing results.
The solution is to stop checking share prices so often.
Volatility can result in a surge of emotions as you see your wealth jump up or down, thereby causing you to take actions that you will regret later.
Get Smart: Sit back, relax, and watch your wealth grow
The essence of successful investing is having the patience to sit on your investments as they slowly but surely help to compound your wealth.
To do so, you need to put your money in strong, well-managed companies with a long growth runway.
As you continue on this path, you will build the confidence that the business will fare well through good times and bad.
Even when the share price gets whipsawed, you will not panic and sell in haste.
So, sit back and relax.
Doing nothing can be an excellent way to invest and is preferred to the frenetic activity that dominates many unit trusts and hedge funds.
If your money is invested in strong companies with sturdy business moats, you can rest assured that they can help you to steadily compound your wealth for your retirement.
This could be the fastest way to jump from a “newbie” investor to a seasoned pro. Our beginner’s guide shows everything you need to know to buy your first stock and beyond. Click here to download it for free today.
Disclosure: Royston Yang owns shares of DBS Group.