Are You Watching the Markets Too Much?

by financialmom on February 24, 2011

in Financial Advisor, Investing

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(This is a guest post, with content written by Symmetry Partners, LLC.  Our firm utilizes Symmetry Partners, LLC for investment management services.)

To The Market Watchers of the World

For those of you who partake in the age old pastime of watching the market, this column is for you. Given that this guilty pleasure has persisted for decades, let’s take this opportunity to examine why people are so infatuated with what the pundits and ticker tape have to tell them.

How do they rationalize hours, days, and weeks of what I believe is wasted time watching a fast moving, multi-colored, streaming banner that flies across the bottom of the TV screen, while they simultaneously try to dissect the latest and greatest advice from their favorite CNBC personality?

Constant Infatuation

To understand our constant infatuation with what’s happening in the markets, we must first analyze some basic human traits, as in my opinion, many individuals are just not well suited to be good investors.  Furthermore, I would suggest that the biggest enemies of many investors are they themselves.

Buy low, sell high! There’s a novel idea. Who hasn’t heard that advice? Aside from pointing out the obvious difficulty in accomplishing this from a market timing perspective, let’s take a high level look at why I believe many investors consistently struggle with making such rational decisions.

Emotional Decisions

If you were to divide the decision making portion of the brain into two parts, the prefrontal cortex and the limbic system, you would find two drastically different functionalities that, in their own right, are designed to protect us in different ways.

The prefrontal cortex represents rational, unemotional decision making and focuses on logic to make long term decisions. The limbic system, more short term and emotion driven, is best suited when the need occurs to make a split second decision, such as slamming on your brakes before rear-ending the car in front of you. Unfortunately, this side of the brain often influences financial decisions.

Because of our emotional attachment to hard earned money, I believe we are unable to separate long term logic from short term noise. When decisions are made in this manner, investors are likely to suffer.

A widely known financial industry study done by Dalbar, Inc. simplifies this phenomenon. The average equity investor over the last 20 years has achieved a 3.2% annualized rate of return vs. the S&P 500 which averaged over 8%.1 The average investors buy high and sell low because of the emotional tendency to sell investments that they feel are underperforming and then replace them with investments that have done well of late.

Long-Term View

When committing money to the financial markets, most investors are investing for the long term; not a mere five, 10 or even 20 years, but rather for their entire lives. Conventional wisdom suggests that as a person ages, the debt to equity ratio in his portfolio should change.

So ask yourself, how does an individual with 20 years until retirement and 50% of his portfolio in equities benefit by watching the markets go up and down each day? Similarly, why would an individual choose to watch the markets day in and day out when she has five years until retirement and only 10% of her portfolio invested in equities?  In both cases, assuming the portfolio allocations have been made based on each individual’s unique risk tolerance and time horizon, they should be suitable, and with long term goals in mind.

In my view, it matters not what the market did today or yesterday, last week, last month or even last year. I believe that long term success is more often than not the result of long term exposure to the capital markets.

Investors Need Discipline

With that said, it’s understandable that maintaining a rational approach to investing can be difficult. Over the last year we have seen the Dow Jones Industrial Average fluctuate from under 10,000 to above 11,000. Stomaching the roller coaster ride is not for the faint of heart.

I believe that is why many of the most successful investors are those who work with a financial advisor as they can provide investors with the discipline they may lack. Advisors may help investors to stay focused on the long-term, while ignoring the noise that could negatively affect their ability to make sound decisions.

While market watching can be fun and exciting, as well as informative, for others, it can be quite nerve wracking.  Isn’t there something that you would rather be doing with your time?

New Profile Pic 2599R Are You Watching the Markets Too Much?Pamela Otten is CEO of Pamela Otten LLC, a Registered Investment Advisor. She loves to work with women business owners and entrepreneurs, and women in transition due to job change, death, or divorce. Pamela will help you set and reach your financial goals, educate you to understand your investments, and teach you how to do more charitable giving. Pamela is a Qualified Kingdom Advisor (www.kingdomadvisors.org), trained and committed to integrating biblical principles with her investment advice.

cc smallest Are You Watching the Markets Too Much?Photo Credit – ed100

Financial Planning, Investment Advice, and Investment Management provided through Pamela Otten LLC, Registered Investment Advisor.

The opinions voiced in this material are for general information only, and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, please consult your financial advisor prior to investing.

1″Quantitative Analysis of Investor Behavior, 2010,” DALBAR, Inc. www.dalbar.com.  The S&P 500 represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization.

Content written by Symmetry Partners, LLC. Our firm utilizes Symmetry Partners, LLC for investment management services. Symmetry Partners, LLC, is an investment adviser registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. All data is from sources believed to be reliable, but cannot be guaranteed or warranted.  No current or prospective client should assume that future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable.  As with any investment strategy, there is a possibility of profitability as well as loss. Please note that you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Symmetry Partners or your advisor.

Copyright © 2010, Symmetry Partners. All rights reserved.

 

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