The Danger of Treating an Investment Account Like an ATM


It’s called “high-frequency monitoring,” and we’ve all been guilty of it. After all, studies have shown we look at our cell phones 150 times a day—so it’s easy to see how we could fall into the habit of checking our investments once or twice…or even a dozen times during the day.

It’s a tempting, but terrible, idea.

What’s wrong with checking my investments?

The problem is that, thanks to our emotions, high-frequency monitoring inevitably leads to high(er)-frequency trading, which can be dangerous. Not only is buying and selling based on daily stock movements (essentially trying to time the market) generally a recipe for disaster, but it could lead to panic-selling or other snap decisions you might later regret.

We get it. On days when the market’s in a particularly bad mood, it’s natural to want to do something drastic, like sell all your investments just to stop the bleeding. But, again, that’s usually a sucker’s bet. The pros call it “locking in losses”—you only actually lose money when you sell an investment. Until then, the losses are purely on paper.

How much could a poorly timed withdrawal really cost me?

Let’s say you had about $2,100 invested in an S&P 500 index fund on June 23, 2016, when the Brexit vote shocked the markets. The value of your investment quickly dropped 5 percent, to about $2,000, by market close on June 27. You panicked and sold—then missed out on the recovery, which took all of four days.

Today, that $2,000 from June 27 would be worth about $2,350 if you’d left it in the market. But if you took it out and stayed on the sidelines, you’d still just have the $2,000 you withdrew—while everyone else enjoyed the 17-percent gain.

Let’s suppose you knew better than to stay on the sidelines too long and jumped back into the market later in the summer—before the U.S. election gave you cold feet again. So you sold on November 4, when your money was worth about $2,085. In that case, you’d have forfeited around $300 in gains—about 15 percent—just by missing the four-month post-election rally.

Come on. Are you just cherry-picking the worst times to withdraw over the past year?

Well, consider this more likely scenario: You invest $100 every month for five years. (Nice.) Assuming 7-percent returns—and ignoring things like taxes or inflation—you’d have about $7,300 after 60 months. (Very nice.)

But life happens: Your car breaks down, you get a big medical bill, your friend gets married in Mexico. So instead of letting your money grow untouched, you withdraw $500 four times during those five years. Your balance falls to $4,911.

Even if you added back a lump sum of $2,000 at the end, your balance would be $6,911. Those moments of weakness cost you $400 in returns, or nearly one-third of the gains you could have realized ($1,300 vs $911).

Let me repeat: Four relatively small withdrawals during a five-year span can cost you one-third of your investment gains! And the more you invest (and withdraw), or the longer time span you examine, the more dramatic the impact.

How am I supposed to cover surprise expenses then?

With an emergency savings account. Ultimately, you’ll want to fund it with three to six months’ worth of basic expenses, but it’s okay to start with a smaller goal of $1,000. This is the money you can use—opportunity-cost free—to cover unexpected bills and repairs, rather than racking up expensive credit card debt or raiding your investment account. With interest rates on savings accounts as low as they are now right, you won’t be missing out on much by tapping it, anyway.