The start of the New Year seems like a smart time to check a retirement portfolio, right? Wrong, according to a new study.
Too much attention could actually hurt a retirement portfolio, especially for those who watch market fluctuations too closely, according to new research from a business professor at Columbia.
Michaela Pagel, assistant professor of finance and economics at Columbia Graduate School of Business, points out that when investors check holdings frequently, and then try to rebalance the portfolio on their own, the new mix of investments can lead them to be financially worse off in the long run.
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"History has shown us that the stock market is a relatively safe bet over the long term because it has typically grown," Pagel said in a statement. "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."
Pagel has come up with a new model which shows how the frequency of portfolio interaction can impact the behavior of investors. It is detailed in a study called, "A News-Utility Theory for Inattention and Delegation in Portfolio Choice."
"Because the prospect of losing money is painful, it bears heavily on how investors perceive risk and make portfolio-rebalancing decisions," according to a statement from the business school explaining the study.
It contrasts with the standard model of investor behavior which details investors' consumption in the present time. In her study, Pagel also considers how most investors appear to experience "emotional reactions to changes in expectations about consumption." Overall, investors often are "inattentive to their portfolios or undertake puzzling rebalancing efforts," she argues in the study.
Retirement advisors may want to suggest periodic rebalancing of clients' portfolios, the study suggests. But asset allocations are perhaps best determined on such factors as an investor's risk tolerance rather than market fluctuations.
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