Good reads from around the Web.
Like many truths in investing, the idea that your portfolio will do better if pay less attention to it seems to defy common sense [1].
After all, it’s not true of many other things in life.
Lawns, relationships, your teeth, and your guinea pig will all suffer under a regime of benign neglect.
However there is solid reasoning from the field of behavioural finance [2] to explain why we usually do badly when we frantically look at our portfolios between every email refresh – or even just every week or month.
In short: It’s because we’re monkeys operating supercomputers.
When we see something happen in our portfolios we want to do something.
And that something is usually for the worst.
The dangers of stock market rubbernecking
But there’s another reason for to keep your online broker [3] password under lock and key, which is that equities are scarier in practice than in theory.
Most people are fine with shares falling when they look at graphs of long-term returns [4].
“Pfft!,” they say, looking at a wobble on some historical graph. “Call that a crash? I remember the dire headlines in 2008, and if I had my time again I’d be in like Flynn. I’d even sell my neglected guinea pig to put more money into shares!”
But they’re rarely so brave in practice.
If they were then fund flows into equities would increase in bear markets and decline in bull markets. But we know the exact opposite is what actually occurs.
Volatility leads to upset stomachs, as The Value Perspective [5] noted this week:
[The academics] ran a second experiment where they showed the results of an investment simulation to different groups of subjects.
One group were shown the results of the simulation as if they were checking their portfolio eight times a year.
A second group as if they were checking it once a year.
And a third as if they were only doing so once every five years.
Once again, the people who were shown the numbers at lengthier intervals – and so saw less volatility in the results – allocated much more aggressively to equities than those who saw them more frequently.
In other words, those who didn’t see how volatile equities were didn’t really care how volatile equities were.
The takeaway?
If you know you should have a big slug of equities to meet your long-term savings goals but the thought of a stock market crash makes you run for the nearest 1%-a-year Savings Bond, then automate your savings [6] into your diversified portfolio, rebalance every year (or maybe even every two or three years)… and the rest of the time forget you’re an investor at all.
You may will be a better investor for it.
From the blogs
Making good use of the things that we find…
Passive investing
- Why are bonds a useful diversifier? [US but relevant] – Oblivious Investor [7]
- Honoring Yogi – Vanguard [8]
- A 10% correction is statistically normal – Ryan Detrick [9]
- Pros chase performance of a cliff – The Reformed Broker [10]
Active investing
- Selling is the easy part – A Wealth of Common Sense [11]
- How unicorns helped me beat the market – Mr Everyday Dollar [12]
- Beware the trough of disappointment in the tech sector – Value Perspective [13]
- FW Thorpe: A for quality, C for value – Richard Beddard [14]
- Putting a price tag on scandal: Volkswagen – Musings on Markets [15]
Other articles
- Why I’m 80 and still a VC – Alan Patricof [16]
- What investment terms will soon be antiquated? – Abnormal Returns [17]
- Investing in websites – The FIREStarter [18]
- If you’re not getting rich in your 20s, you’re doing it wrong – MMM [19]
- Is your brain a fortress or a wild bus ride? – Dynamic Hedge [20]
Product of the week: Natwest is launching a new 3%-paying cashback current account, reports The Telegraph [21]. The account does not pay the chunky interest rate you get with Santander’s 1-2-3 offering but it typically pays higher cashback rates, so it could be a good option if you don’t keep much cash lying around in your current account.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1 [22]
Passive investing
- Swedroe: Market efficiency isn’t a myth – ETF.com [23]
Active investing
- Steve Cohen’s hedge fund school – Business Insider [24]
- Back-testing blamed for yet another hedge fund blow-up – NY Times [25]
Other stuff worth reading
- Markets: Can they really be tamed? [Search result] – FT [26]
- Are you ready for the next bear market? [US but relevant] – Fortune [27]
- The £1m mortgage business – The Guardian [28]
- Debate: Should old people downsize to help the young? – The Guardian [29]
- The London Underground rent map [Cool graphic] – Huffington Post [30]
- £37,396 a year is the perfect salary for the British – ThisIsMoney [31]
- Dealing with an investing blind spot – NY Times [32]
Book of the week: I’ve included Ben Carlson’s blog A Wealth of Common Sense in these links many times over the years and I flagged up his new book based on my fandom. But then Ben kindly sent me a copy of his book via the magic of Kindle [33]
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- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩ [39]]