Don't Look, Don't Trade.
The spread of the coronavirus around the world with its resulting economic impact has resulted in large losses and increased volatility in the equity market. Investors may be looking at their portfolios and wondering what their next course of action should be. An article from Morningstar recommends that investors look at their portfolios less frequently and stay the course. We agree. We believe that individuals should invest for the long-term in a strategy that is firmly rooted in financial and economic theory.
Thinking Fast and Slow
In his book Thinking Fast and Slow, economist Daniel Kahnenman summarized the two speeds in which people process information. System 1, or fast speed, allows us to respond quickly to external stimuli – think fight or flight. System 2, or slow speed, is slower and thoughtful.
How does this affect investment decisions?
Equities for the Long-Term
Before answering that question, it is helpful to understand the long-term performance of equities. Citing Ibbotson data, Morningstar notes that one dollar invested in US large-cap stocks in 1926 would have grown to $7,353 by the end of 2017, versus $21 if invested in US Treasury bills. In other words, stocks outperformed over time.
Research has highlighted a concept known as loss aversion. Again, drawing on Kahneman’s research, investors feel more pain when they lose money than they do pleasure when they make money. As a result, they demand high compensation for taking chances. Since equities are riskier than Treasuries, they have historically enjoyed higher returns.
But, loss aversion can cause investors to check their portfolios often.
Tying It All Together
Additional research highlighted that investors who checked on their portfolios once each year tended to behave as though they had a planning horizon of one year. The research also highlights that the odds of losing money in risky assets with positive returns, like stocks, declines with time. Investors’ perception of risk, according to the research, increases as they check on their portfolio more frequently.
Therefore, Morningstar argues, the further we remove ourselves from the day-to-day gyrations of the market, the less risky we will perceive our investments to be. This should help investors to stay invested and reap the potential long-term rewards of investing in equities.
Don’t Look, Don’t Trade
To summarize, the more frequently investors look at their portfolio, the riskier they will likely perceive it to be. This may result in more frequent trading and make it more likely that they will make the wrong decision at the wrong time.
Instead, investors should focus on an investing strategy with a sound financial and economic underpinning and stick to it, regardless of the day-to-day market movements.
The Armor US Equity Index ETF (ARMR)
The Armor US Equity Index ETF (ARMR) seeks to provide investment returns that, before fees and expenses, correspond generally to the total return performance of the Armor US Equity Index. The index is designed to provide exposure to the sectors of the US equity market that the fund’s index provider believes are most likely to generate positive returns while providing downside protection and experiencing lower volatility relative to the US equity market.
The index which serves as the basis for ARMR uses sector momentum, which looks to invest in sectors that have been experiencing positive performance, in an aim to achieve its goal.
Past performance does not guarantee future results
 Johnson, Ben, It’s Tough to Tune Out, But It Might Be Best, Morningstar, 3/13/20
 Kahneman, Daniel, Thinking, Fast and Slow, 2011
 Kahneman, Daniel & Tversky, Amos, Prospect Theory: An Analysis of Decision Making Under Risk, 1979
 Benartzi, S,, & Thaler, R., Myopic Loss Aversion and the Equity Premium Puzzle, 1993