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Investors Forget Bulls and Bears, Be Observant Ostriches

September 16, 2008

Posted by Roshawn Watson under Uncategorized

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By: Roshawn Watson

Perhaps it is the negative financial headlines dominating the media that’s causing many investors to avoid checking the balances of their investment accounts. The current sentiment is “if the savviest investors, the leadership of major finance firms, are failing to successfully navigate the market, then what are the chances for the small individual investor to come out ahead.”

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Scary Times

To state that the markets have suffered recently would be a tremendous understatement. Many of us, even professional investors, are accustom to uninterrupted gains over the course of a year. For examples, from 1982-1999, there was only one year where the market went down. However, with abundant business failures and with every economic hiccup getting significant amounts of attention, the major indexes are down 10-15% this year.

Volatility
Perhaps even more troubling than a down market is the uncertainty. For example, the Dow just loss 504 points in a single day (a 4.4% change), the largest single day decrease since 9/11/2001.

Although market gyrations are rather common, volatility does appear to be on the rise from from recent years. In fact, between 2004-2006, we had historically low volatility. However, daily moves in the Standard & Poor’s 500 by 1% or more have come, on average, twice a week in 2008, up from once every four days in 2007 and once every nine days in 2006. Daily index changes of 2% or more in either direction — seen only twice over a three-year stretch ending in late 2006 — have occurred nine times since early July.

It is perfectly reasonable that if the Dow can increase by 400-600 a day, then a commensurate decline would not be wholly unexpected; however, the dips are still dispiriting. The volatility is the trade-off for investing in equity such as stocks, which over the long-term have out-performed every other asset class.

Forget Bulls and Bears, Be an Observant Ostrich An ostrich is “someone who attempts to ignore unpleasant facts or situations.” During crappy markets, investors do not necessarily like to know what’s going on; this is known as the “ostrich effect.” Having a general knowledge that your accounts are not doing well is significantly more pleasant than “knowing” what percentage of your net worth you just loss.

New research suggests that investors check their accounts 50-80% less during bad markets.

Essentially, avoidance becomes our medicine of choice. According to psychologist and author Paul Andreassen, the more information investors have on their holdings, the more they trade and the lower the returns they earn.

True ostriches (those who completely ignore all financial news during bad markets) can come out ahead of these traders, but there is also a big downside. Being completely unplugged causes investors to miss opportunities to win big during the upswing, which will come. The best strategy is to be an observant ostrich. Here are some tips.

Avoid being in fear about the market. Fear breeds bad decisions, such as selling a good stock when its price is low. If the only way for one to avoid fear is to stop looking at headlines during a week where everything appears like it is crashing, then so be it.
Look for bargains. It is well-known that the best way to invest is to buy low and sell high. Thus, after the dust clears, see if there’s a diamond among the debris. Just because you are not timing the market does not mean you cannot load up on quality equities while their prices are low.
Maintain a long-term view of wealth. Over time, it is possible to achieve phenomenal wealth. Remember, diligent investors win in the long run.

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