Saturday, May 04, 2002
Hands-off approach to investing
Did you cringe when the Dow Jones Industrial Average fell below 10,000 last week?
Did you check out the movement in your retirement account when you heard that consumer confidence dipped in April?
Do you nervously open these business pages wondering what other calamity might befall your hard-earned savings?
If so, then you might be paying too much attention to the minutiae of economic news. Studies show excessively worrying about the market's daily gyrations can only stress you out and actually lower your returns.
People attending the market all of the time are going to end up trading more, said Terry Odean, assistant professor at the Haas School of Business at the University of California, Berkeley. Trading can be hazardous to your wealth.
Dr. Odean said market-watchers trade more because it seems reasonable not to let their time and energy go to waste. Putting their news and information to work makes sense but doesn't typically make more money.
His study, titled All that Glitters is not Gold, found that individual investors tend to buy stocks that catch their attention, either because of news reports or heavy trading volume.
Institutional investors, such as mutual-fund managers and professional money managers, are not so apt to be caught up in the stock du jour. They do more substantial research on a greater number of companies than individual investors, and typically get better returns.
Investors prone to engaging in attention-based buying do not benefit from doing so, says the report, co-written with Brad Barber of UC-Davis. The attention-grabbing stocks that they buy do not outperform the market; nor do the attention-grabbing stocks they buy outperform those they sell.
Keeping a distance
Individual investors should take a cue from those professionals, said Jeannette Jones, president of the Asset Advisory Group in Glendale. People should not let emotions take over their investment decisions.
Market-watching has become an obsession, it's become part of our culture, Ms. Jones said. But we tell people, do not look at what's going on on a day-to-day basis.
Academic studies support that advice, too: University of Chicago's Richard H. Thaler and UCLA's Shlomo Benartzi found that investors who evaluate their portfolios too often are too afraid of losing money. They don't take enough risks and therefore don't get good enough returns.
If you're a long-term investor, with years to go before needing that money for retirement or college educations, resist the temptation to pull up that account statement on the Web every time the market makes a short-term move.
So the Dow is up 100 points one day and down 120 points the next? Have discipline, remember your long-term plan, and repeat after actor Bill Murray in Meatballs:
It just doesn't matter, it just doesn't matter, it just doesn't matter.
E-mail firstname.lastname@example.org. Past columns at Enquirer.com/columns/higgins
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