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This is the mistake you're most likely to make during market volatility

Key Points
  • When the market swings, there's one mistake all investors tend to make: checking their account balances too frequently.
  • Just checking in on your accounts can prompt you to take action. But the problem is those choices are often driven by your emotions at the time.
  • Instead of checking on your investments and then deciding what moves to make, consider reversing those actions.
Peter Cade | Image Bank | Getty Images

When you hear the market has suffered a big drop, your first instinct is probably to check your investment account balances.

But that is actually the opposite of what you should do, according to Dan Ariely, chief behavioral economist at Qapital, a provider of a personal finance mobile app, and professor of behavioral economics at Duke University.

The advice is especially prevalent given recent market activity. The three major U.S. indexes — the Dow Jones Industrial Average, and the Nasdaq Composite — closed in correction territory on Friday for the first time since March 2016. Stocks extended that slide into Monday.

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Some financial experts are predicting that the wild market swings could be here to stay.

And that likely means more confusion for investors.

"Volatility is inherently frightening," Ariely said. "Being frightened means that we are paralyzed, we think about it too much.

"It influences our well-being, and it doesn't necessarily lead to good decisions," he added.

Don't check too frequently

Checking numbers too often can make it more difficult to accurately interpret trends, according to Ariely.

Take weight loss, for example. If people look at their weight in precise measurements with decimals — say 162.3 pounds — they tend to create stories to make sense of what they are seeing. And the result is often that they become unmotivated, Ariely said.

But if instead people look at their weight data in a less granular way, say how it trends over several weeks, they can more accurately see what is happening. Plus, they tend to get less anxious and take better care of their health, according to Ariely.

Dan Ariely, behavioral economist and psychologist.
Photo: Mary R.
Lock yourself out

The same advice applies to investing.

In 2008, when the markets were going crazy, Ariely found himself checking his own accounts more frequently as everything changed every half hour.

On a Friday morning, before a weekend away with his wife, he found himself consumed with checking his investments. And the compulsion put him in a bad mood.

"I wasn't going to sell," he said. "I wasn't going to buy; I was just kind of looking obsessively.

"It was about noon when I realized I was out of control," Ariely added. "I was looking too much."

What Ariely did next might seem extreme to some investors. He entered his password wrong three times and locked himself out of his account.

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"I couldn't check anymore, and the weekend was much nicer," Ariely said.

What's more, Ariely took his time before fixing his account so that he could check it again.

"If we're going to look at it going up and down, we're just going to be more miserable," Ariely said. "We're not only going to be more miserable, but act on it."

Those moves often include fleeing from stocks to bonds or cash — investments with a higher expected value for those with a lower expected value.

Today, Ariely said he frequently fields inquiries from investors who want to know if they should sell everything and move to Treasury bonds.

"Historically, those are some of the biggest mistakes that people can make," he said.

Make intentional changes

For most people, it's better not to check their accounts.

"Every time you open your portfolio and it changes your emotions, oftentimes you make a bad decision," Ariely said.

Of course, there are times when you have to log in. The key is to be intentional when you do.

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"Decide what change you want to make, and only then open your portfolio," Ariely said. "It's never a good idea to open up your portfolio for fun and then decide what to do."

Certain moves — such as rebalancing to make sure your portfolio weightings are still in line with your goals — are healthy, as long as you don't use those strategies too often.

A good sweet spot for rebalancing is once per year to once per quarter, depending on your investment profile and market changes, financial advisor Paul Pagnato, CEO of PagnatoKarp, recently said.