Even though he considers himself a relaxed investor, who rarely does any trading, Meir Statman usually takes a look at his investment account at Vanguard at least a few times a week. By doing so, the Glenn Klimek Professor of Finance at Santa Clara University and author of What Investors Really Want ignores traditional buy-and-hold wisdom, which suggests that checking up on things a couple of times a year, and rebalancing if necessary, is plenty for most investors.
The 63-year old behavioral finance expert might sneak a peek at his portfolio if he's working and needs a break, or after he's checked his email. Like many people, he enjoys the satisfaction of seeing the little green numbers pop up when the market has done well. But he doesn't obsess about losses on down days.
"As an investor, I'm kind of like a sail boat with its sails down, bobbing with the waves and taking things as they come," he says philosophically. "A lot of people view following the market and their investments as a kind of pastime, like watching football, but don't necessarily take any action in response. And that's perfectly okay."
What's not OK is when emotional reactions to witnessing the daily market gains and losses get in the way of clear thinking, which evidence suggests happens an awful lot. During the 1980s, Statman co-authored a study that first documented the "disposition effect," a tendency for investors to take gains off the table on winning transactions too hastily and reluctance to realize losses. In 2007, a team of researchers in Israel concluded that access to market performance information increases the odds that people will follow those patterns.
Other academic research, as well as statistical data such as the flow of money in and out of mutual funds, suggests that when the market rises for awhile investors believe it will continue on an upward path and pile in. Conversely, when the market drops, they assume such negative performance will continue and stay away from the market or sell their holdings. In either case, frequent quote lookups and portfolio peeking are likely to exacerbate these emotional reactions.
Charles Rotblut, vice-president of the American Association of Individual Investors, has noticed that interest in checking portfolios appears to wax and wane with the market tides. When the market is up, traffic to the association's website spikes as investors check quotes more often and use portfolio management tools. When the market falls for an extended period, traffic to the website declines as investors take on a bunker mentality.
Despite ample evidence that many investors do the wrong thing at the wrong time, Rotblut says frequent monitoring of a portfolio is perfectly fine as long as you take steps to wring the emotion out of the process.
"If you're investing in individual stocks you need to check at least once a week because it's important to stay on top of breaking news, earnings guidance, mergers, or management changes," he says. "If you're investing in diversified mutual funds or exchange-traded funds, once a month or even once every quarter is probably enough." Rotblut, who prefers stocks of individual companies over mutual funds or ETFs, likes to check his portfolio every day because it "gives me a sense of control about things."
In an age when checking intra-day values and making trades is just a few potentially hazardous mouse clicks away, how can investors avoid the temptation to react impetuously to daily gyrations?
Rotblut advises stock investors to separate normal market fluctuations from what is going on at a company, and to discipline themselves so they can avoid reacting too hastily to either positive or negative information. "Before I buy a stock, I write down the reasons I like it, and what would make me decide to sell. When it goes down, I look at what I wrote and ask myself if the downturn is because of a fundamental change in the business or just market fallout."
He also sets downside price targets, and sticks to them. If a stock drops 10 percent from his purchase price, he'll review his original analysis of a company and determine if the reasons he bought it are still valid. If it drops 20 percent, he will assume that there is something amiss with the company that he may not be aware of and will likely sell.
Statman has a simpler solution.
"If you're tempted to do something silly, my suggestion would be to grab a piece of chocolate or go take a cold shower instead."
So we are not supposed to do market timing? But that’s what the pros do, all day long. That’s what their computers are programmed to do, in microseconds. Why are individuals different?
How does an individual know that the company he invested in is a good long-term investment? Because the CEO said so? What if the market is going up, and the stock keeps dropping? Do you hang on to it?
What if you think a big correction or crash is coming? Do you ride it out, like millions did in 2008, because their “advisors” told them to? Those that rode it out are just now getting back to parity. Those who sold, then bought near the bottom, have made roughly 100% or more, without using margin or any other tricks. But you have to be brave enough to get back in near the bottom. You don’t have to call the bottom perfectly; close is good enough.
What if you think there will be a crash, and you decide to sell, and then the crash doesn’t happen? You’ve lost some profit, but you’ve still got your money. What if you decide to hold? If the market crashes, you’ve just lost a lot of money. Let’s say you lose 50%. To get back to parity, the market has to go up 100%, because you lost half of your investment. The market doesn’t gain 100% very often.
I believe the buy-and-hold strategy was OK when the markets and the economy were healthy, and there wasn’t the amount of chicanery that there is today. Now we have an economy fueled by quantitative easing from the Fed. What if the Fed shuts off the spigot? Anybody doing buy-and-hold today is begging to be fleeced, IMO. If you don’t have the time or inclination to manage your investments, then I think the best thing is to stay out of the market. The stock market is a hungry lion that will devour the slow and the weak. Nations and empires rise and fall. Long-term trend lines mean nothing when the whole planet is in upheaval.
What? If you take a look off a Libya for a while, you’ll get a clearer picture?
So, this reluctance to make right decision at right time, shown before and after 9/11 has nothing to do with uncertainty?
Like there is a certainty in gold if people start to torch themselves to fend for their families? Would you consider the certainty of oil while you’re at it?
Let me share a thought.
Failure to reach the global freedom from want will lead to more and more tribe wars.
As seen in the present.
How much space if everyone is lined up shoulder to shoulder does the world’s current population take up?
I’d like too see some air powered, gas guzzling, electrically eccentric road driving sky diving vehicles, yesterday.
Once whole thing starts to move without damn restrictions…
stop pressing restart to continue.
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