The yo-yo and the escalator: where should we look?

A younger colleague recently asked me what has been the greatest technological development in my working life.

Apart from the unsettling realisation that this clearly means I am considered old, I thought it was a fascinating question.

After some internal debate about the internet v the smart phone, I settled on 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 series of Star Trek.

This question caused me to reflect on the value of immediate access to information — when it is helpful and when it can be unhelpful.

With the returns from fixed interest investments currently sitting at 30-year lows, many of the models that drive the design of investment portfolios have been reweighted towards higher risk assets.

They now include a higher allocation to more volatile share investments to try to compensate for the lower returns being generated by the fixed interest part of the portfolio. As a result of this, the volatility investors are likely to experience in pursuit of their desired return will be higher than that of the past.

Now enter the smart phone, with an app that allows you to check on the value of your portfolio when you're waiting for your morning coffee.

The convenience of the smart phone means we often end up checking our phone just because we can, rather than when we need to.

Don’t get me wrong, being able to access up to date information on the holdings within your portfolio (or KiwiSaver account) is an important feature, but for me it comes down to how often it is healthy to check it.

I have coined a name for the condition of constantly checking the value of your portfolio: yo-yo myopia.

The worrying feature of this condition is that the sufferer becomes completely distracted by the daily movements of their portfolio and forgets the important fact that they are standing on an escalator.

By this I mean that although the value of an investment will move up and down (just like a yo-yo) over time, the underlying value of the collective portfolio will be growing. Much as in the same way that when on an escalator it is easy to forget that you are moving up — you find yourself at the destination before you know it.

The problem with yo-yo myopia is not just that it creates unnecessary stress for the investor, but it runs the risk that investors will sabotage their own objectives. This can happen if the investor is frightened out of the market (i.e., steps off the escalator) or becomes too conservative with their asset allocation with the aim of reducing the volatility of the yo-yo.

Studies have shown that investors working with an adviser can enjoy up to 3% pa better return than DIY investors. A portion of that additional performance is caused by smarter investment choices, but the majority of the enhanced return can be attributed to two factors: helping the client maintain the right asset allocation for their age, stage and risk profile, and staying invested (and continuing to invest) when markets are volatile.

Having read this you can now understand why yo-yo myopia concerns me. With the best of intentions, the provision of too much information can inadvertently be working against some investors, by highlighting the degree of volatility and encouraging a short-term focus rather than considering the bigger picture. My recommendation would be not to overuse the app; perhaps checking once a month might be enough.

Volatility is the price we pay to achieve a higher return, especially in the current environment. Remember, if your portfolio is correctly structured, the escalator will ultimately do its job.

- Peter Ashworth is a principal of New Zealand Funds Management Ltd and is a Dunedin-based financial adviser. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.


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