Avoid MLA this Fall
In our recent posts we’ve discussed the likelihood of enhanced market volatility this fall. With the news of President Trump and other high level government officials having COVID-19 we believe it could stoke the volatility even further. Times like this magnify our feelings of uncertainty and often raise fear levels. It can lead us to feel out of control. As it relates to our money, how do we respond? We check our online balances more frequently. There may be an unintended consequence to this simple act.
Myopic Loss Aversion (MLA as I like to call it) is a fancy way of saying the more you check your portfolio the greater the tendency to get conservative with your asset allocation and investment decisions. If you reflect back to March and April of this year then this concept might be relatable. See the illustration below for the asset allocation differences between those who checked their portfolios monthly vs annually.
It’s one thing to make a tactical portfolio adjustment, but if you’re a long term investor acting on your investments because of MLA can have a detrimental impact. Trying to time or trade the market is a fool’s errand. We recommend maintaining an asset allocation that accounts for your risk tolerance and investment objectives. We believe owning high quality investments and holding sufficient liquidity also are important variables in being successful long term investors. Next time the volatility begins to spike keep this concept in mind. The vaccine for MLA might just be self-awareness and a good coach.