NEW YORK (MainStreet) — If you agonize over your retirement savings — constantly tweaking mutual funds, tracking short-term performance and massaging your investment mix — you may think you're working hard for your money. In fact, you may be overworking it – and dragging it down in the process.
Michaela Pagel, assistant professor of finance and economics at Columbia Business School, says your retirement portfolio may be best served by giving it a solid dose of inattention.
"Recent evidence suggests that investors either are inattentive to their portfolios or undertake puzzling rebalancing efforts," Pagel writes in her research study. "History has shown us that the stock market is a relatively safe bet over the long term because it has typically grown. Investors would be wise to keep this in mind, because those that check their portfolio too often and are driven by the daily or hourly fluctuations in the market may make decisions that have a negative impact on their long-term financial prospects."
The academic developed a theoretical model to determine just how often investors should analyze and rebalance their investment holdings. The results seem to indicate that the more we worry about losing money and try to prevent such setbacks, the greater we perceive risks and make changes based on emotional reactions.
"If the investor cares more about bad news than good news, then fluctuations in expectations about future consumption hurt on average," Pagel says. That means stop worrying about the daily ups and downs of the market, and forget the frequent fine-tuning.
Of course, the study does not imply that investors "simply forget about your retirement portfolios or leave them to chance."
"Once in a while … the investor has to look up his portfolio and then rebalances extensively," the professor says. "The investor may ignore his portfolio because he has access to two different accounts: a brokerage account, through which he can invest a share of his wealth into the stock market, and a checking account, which finances his inattentive consumption. These two accounts relate to the notion of mental accounting because the accounts finance different types of consumption, they feature different marginal propensities to consume, the investor treats windfall gains in each differently, and they allow the investor to overconsume less and to exercise more self-control."
Pagel also offers a tip as to what kind of financial advisor might be best suited for long-term investor results. And she believes it's not one who offers frequent updates and "tactical repositioning."
"People should look up their portfolios only once in a while, should choose lower portfolio shares toward the end of life and should delegate the management of their portfolios to an agent who encourages inattention," Pagel concludes.
Hal M. Bundrick is a Certified Financial Planner and contributor to MainStreet. Follow him on Twitter: @HalMBundrick