Market monitoring

23rd September 2011 by Mindful Money

I found myself shouting at the TV today, something I usually do only when GB or England are competing.

In this case it was because of a comment on the stock market.

The reporter said that markets were down and the news had driven US investors into the “safe haven” of bonds, causing bond yields to drop to the lowest levels since the 1940s.

That was bad enough, but she went on to advise people to keep an eye on the markets day to day.  You might not think it affects you, she said, but people have pensions and savings, and gave figures about the amount in ISAs, apparently intended to make people stay glued to market information.

There’s so much concentrated bad advice there that it’s hard to fit comment into a post, but here goes:

Safe havens

Nothing is “safe”.  Investments are relatively safer or riskier, but apart from anything else risk is usually measured as volatility and that isn’t a good proxy for risk (apart from being calculated with statistics that aren’t suitable for the distribution of a market).  Bonds tend to be safer, since one assumes Governments can always cover debts as they literally have a licence to print money.  But it isn’t “safe” in absolute terms, in the same way as “penny shares” aren’t absolutely risky (although they are clearly riskier than a blue chip).

What are you going to do about it

If your pension fund or ISA is worth less, what will you do?  Take the money out?  And lose all the tax advantages etc. that caused you to put it in there in the first place?  Take the money out and put it into a “safe haven”, like cash or bonds?

That’s a big misconception that chasing the next rising share or dipping in and out of the market – timing the market is a good move.  Actually, as far as there are sure things, it is a sure loser. You move from one share or fund to another, thinking the one you’re in will go down and the one you move to will go up.  But what happens is that you can’t time the market, so on average you don’t make money at all (in fact, the data suggest you lose).  The big problem is that you have some costs (even with discount brokerages, with “free switching” in a fund, etc.).

For example, Barber and Odean did a survey about 12 years ago of the six year trading history of 35,000 households from a large discount brokerage.  Men, as I’ve mentioned before, tend to be more status seeking and competitive (and hence overconfident) than women.  They therefore think they can do better and trade more.

Result, men traded 45 percent more than women and the trading reduced the men’s net returns by 2.65 percentage points a year as opposed to 1.72 percentage points for women.

Of course, they all lost money on dealing costs even in a steadily rising market .

Day to day

Unless you’re a professional trader who needs to, I’d suggest you ignore the day to day prices and market movements.

Psychologically it’s only going to upset you, and probably prompt you to take actions that cost you money.  You’re supposed to be investing for the long term, for value.  That’s what pretty much all the really successful people do, Peter Lynch, Warren Buffet etc.

And if you think you need daily prices – the final word to Mr. Buffet, from 1993.  If he doesn’t think he needs daily prices, why should you?

“We don’t need a daily quote on our 100% position in See’s or HH Brown [companies of which Buffet’s Berkshire Hathaway Group own 100%] why, then, should we need a quote on our 7% interest in Coke?”

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