The Secret to Investing in Volatile Times
The financial media loves volatile markets. When the market drops, investors understandably become anxious. They have questions like: What is causing the decline? How low will the market fall? Should I sit on the sidelines until things “settle down”? Are there “defensive stocks” I should buy that will protect me during this period of uncertainty?
Pundits then come out of the woodwork to answer these questions, and more. They give lofty-sounding explanations for what is happening and often make predictions about the future direction of the market.
Ignore the pundits
Jim Cramer frequently leads the charge. On June 21, 2012, when the S&P 500 index closed at 1,325.51, Cramer “explained” the sharp decline on that date as follows: “…lots of investors freaked out that there might not be enough end demand for everything that’s fashioned from commodities, not just the commodities themselves.”
How should investors have reacted to this one-day drop? According to the article, Cramer “reiterated that it’s perfectly reasonable to take some profits after the market’s big run. Investors shouldn’t sell everything, though, he said. There are still plenty of stocks that will thrive in today’s environment.”
The S&P 500 index closed on Sept. 11, 2015 at 1,961.05, an increase of 48 percent over the close on June 21, 2012. Investors who took “some profits” on June 21, 2012 likely reduced their returns when compared to those who stayed the course.
“Watching” the market is nonsense
The secret to investing in volatile times is counterintuitive. Here’s how I learned about it. As an attorney, I used to cross-examine brokers on behalf of investors who suffered losses due to misconduct. I found these brokers frequently testified about how they “watched” the market every minute. They seemed to believe this gave them special insight. So I asked them to describe what they did to monitor the market. They said they “watched the tape.” Then I posed this question: “What were you looking for?” Not a single broker was able to provide a coherent response.
The stark reality is that “watching” the market is a non-productive exercise that’s often harmful to your returns.
The Fidelity experience
According to an article on Business Insider, Fidelity Investments did a study to determine which of their accounts performed the best. The results were shocking. It found the best-performing accounts belonged to investors who forgot they even had one with the firm. Because they were ignorant of the existence of the account, these investors did no trading.
The same article quoted Barry Ritholtz, a wealth advisor, financial columnist and blogger. He related some of his experiences in estate planning where families were fighting over inherited assets. Because of these conflicts, the accounts were not touched for 10 or 20 years while family members worked out their differences. According to Ritholtz, families would later discover that these accounts often performed best during those periods of forced inactivity.
Instead of watching the breathless reporting from the floor of the New York Stock Exchange, do the opposite. Ignore the financial media. Pay no attention to what is happening in the market. Be blissfully ignorant. Spend the time you might normally devote to these anxiety-producing activities on pursuing your hobbies, spending time with your family and taking a vacation.
Once you understand that monitoring the markets is harmful to your long-term returns, a whole new world of opportunities will await you.
This commentary originally appeared September 15 on HuffingtonPost.com
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