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Daily checking makes the market look dangerous. Stocks go up and down, and a portfolio that reads down 5% one day and up 6% the next is stressful to watch. People respond by putting less money into stocks.
For long-term investors who can buy and hold for a very long time, stocks are a lot safer than that daily picture suggests. Index funds are the settled answer on what to buy. The hard part is doing it, because brains are designed for survival, and a plan to invest today, ignore everything that happens in between, and have money left to fund retirement later sits far from that design.
Why does checking more lead to less risk-taking?
Shlomo Benartzi and Richard Thaler named the pattern myopic loss aversion in a 1995 paper in the Quarterly Journal of Economics. People feel a loss roughly twice as strongly as a gain of the same size, and frequent checking surfaces more of those losses. In a 1997 experiment, Uri Gneezy and Jan Potters found that participants who saw the results of their bets more often put less money at risk.
Why do most active funds trail index funds?
S&P Dow Jones Indices publishes a scorecard called SPIVA that compares actively managed funds with their benchmarks. Over 15-year periods, roughly nine in ten US large-cap funds have trailed the S&P 500 in recent editions. Fees and trading costs account for much of the gap.
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