How to Improve Your Risk-Adjusted Returns

If you’ve ever been at a blackjack table, you know that it’s nice to win $100, but it really sucks to lose it.

Investors are no different than gamblers in that they ascribe different values to an equivalent gain or loss. The bad news is that we’re all pre-programmed with loss aversion. The good news is that we can decide, to a certain extent, how often we choose to see losses.

The more you look at your portfolio, the more likely you are to see red, and the more likely you are to see red, the more likely you are to do something you will regret later. This can be seen clearly in the GIF below, courtesy of Nick Maggiulli

For a simple 60/40 portfolio, this is how often you’re likely to see a loss in your portfolio:

  • 46% of all daily returns
  • 36% of all monthly returns
  • 33% of all quarterly returns
  • 26% of all yearly returns

You’re almost twice as likely to see red if you open your portfolio on a random day then if you only check once per year.

This advice, I’m not proud to admit, falls in the “do as I say, not as I do” pile. I have 30 minute candles on eight different asset classes on my computer screen. This is probably overkill, but it’s my responsibility to know what’s going on in the markets on a day-to-day basis.

It’s your responsibility to put yourself in the best position possible to mitigate your biases, and how often you log into your portfolio is the lowest of the low-hanging fruit.