The biggest threat to your portfolio right now is you

The wise man listens to meaning; the fool only gets the noise — Nassim Nicholas Taleb

Times are changing and I don’t like the direction in which society is collectively headed. Not only are our thought patterns changing but so is the overall quality of our mental health and personal well-being. The past three months of lockdown is putting people to the test, with many of us watching the news non-stop or constantly scrolling through social media searching for clarity amid the madness.

Instead of finding a way out, we’re being bombarded with negativity, including the daily antics of our politicians, riots and protests over racial injustice and police brutality, record levels of unemployment and debt and a pandemic that seems to be getting worse, not better. Given all of this, it is no surprise that people are asking why markets have been moving up instead of down.

In the face of all of this negativity, I’m often asked which factor poses the biggest threat to an investor’s portfolio. My response to this question is always unequivocal — the biggest threat is you, the investor. I would argue this is more the case now than ever: If an investor is not cognizant of the effect this negativity is having on their thought patterns, it can lead to dangerous and costly decisions.

The good news is there is a solution. It begins by trying to become a clear thinker by separating out the noise from what’s really important. The tough part though is it means unplugging from society’s daily programming, which can be very difficult to do.

Naval Ravikant, chairman of AngelList, offered some great insight on this challenge when he was interviewed recently by Joe Rogan on his podcast.

“Now it’s all diseases of abundance. We’re over-exposed to everything. So the way to survive in modern society is to be an aesthetic, it is to retreat from society. There is too much society everywhere you go, society in your phone, society in your pocket, society in your ears … everyone is trying to program everybody. The only solution is to turn it off.”

Nassim Nicholas Taleb, the statistician, ties this back to the investment world in his book “Fooled By Randomness,” showing that increasing the frequency of how often one checks their portfolio changes the probability of seeing a negative result.

In his example, a portfolio that yielded a 15 per cent return and 10 per cent volatility, the odds of seeing a loss increases from seven per cent to 33 per cent just by shifting the time frame from yearly to monthly. It gets even worse to 50 per cent if looking at it on a daily basis. As a result, “over the short-term increment, one observes the variability of the portfolio, not the returns. In other words, one sees the variance, little else.”

Now we’re not advocating against portfolio performance tracking, but more so being aware of the emotional risks involved when looking at your portfolio on a more frequent basis, especially in light of all of the negative news.

This doesn’t mean one shouldn’t be active during such times — but investors should do everything they can to remove the emotional impact of near-term volatility from the process by focussing on  rebalancing and long-term strategic positioning.

Finally, having a financial plan and a portfolio designed to achieve a target return specific to your situation can be extremely helpful in providing direction during these uncertain times.

Once these safeguards are in place, I challenge you to unplug from all the noise, take advantage of those favourite books you’ve been meaning to get to and enjoy the summer sunshine. Not only will your mood improve but so will your portfolio.

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