Chief Investment Officer
Bill Few Associates, Inc.
The next time I hear another economic expert say an event (weather, GDP, Greece, Fed rate hike, etc.) is already priced into the market, I am going to throw something! Many investment experts believe the stock markets are forward-looking. This implies that investors have considered the impact of known events (current or future) and that information is reflected in the current price of the stock market. As an example, many “experts” predicted that Greece’s most recent standoff with the rest of Europe (they have been failing for years) was already priced into the market and if they failed, it would have no major impact on markets around the world. Yet on Monday, June 29, when Greece’s first bond default was imminent, the Dow Jones Industrial Average dropped 350 points (2%). Evidently, the default was not fully priced into the market yet.
On Sunday, July 5, Greek citizens voted “No” to further austerity in dealing with their European creditors. How this will ultimately play out globally is not yet known, but I believe it is not priced into the market. The Greek people (at least the 61% who voted “No”) either do not believe they have a debt problem or they think the problem is not their fault. Either way, you cannot negotiate with someone who will not admit they have a problem in the first place. Greece (whether they split from the European Union or not) will now certainly have more direct control over their destiny. However, they will most likely be taking several painful steps backward as a sovereign before they move forward.
So, how do you avoid the painful ups and downs of market swings generated by the headlines of the day? On my vacation last week in the Outer Banks (we escaped, shark bite free), I read an exceptional book, Thinking, Fast and Slow by Daniel Kahneman. The book is 499 pages of small print, written by a Nobel Prize winner in Economics. No summary that I could briefly write would do it justice. The author writes in a way that is very easy to understand, but the book is not a quick read, as he covers a great deal of deep thought about how we as humans process information. One of my favorite insights from the book is the following:
“The combination of loss aversion and narrow framing is a costly curse. Individual investors can avoid that curse, achieving the emotional benefits of broad framing while also saving time and agony, by reducing the frequency with which they check how well their investments are doing. (I added the underlining for emphasis.) Closely following daily fluctuations is a losing proposition, because the pain of the frequent small losses exceeds the pleasure of the equally frequent small gains. Once a quarter is enough, and may be more than enough for individual investors. In addition to improving the emotional quality of life, the deliberate avoidance of exposure to short-term outcomes improves the quality of both decisions and outcomes.”
Essentially, he is saying that the mind can play tricks on us when we see a plethora of both negative and positive news over a short period of time. When this occurs, we see the glass as half empty and focus on the negatives more than the positives. This instinct is not all bad; it kept our ancestors from getting eaten or hurt (better safe than sorry). However, this thinking does not help our investment performance. Rather, it can be a hindrance to our performance.
Since January, the Dow Jones Industrial Average has flipped from positive to negative, or vice versa, 19 times. The index has been essentially flat and fluctuating around a level of about 17,800. If you believe Mr. Kahneman, and I do, those 19 swings up and down will leave you feeling worse about your investments than if you had only seen two data points (the value of your account once a quarter). I know that in today’s 24/7 world with most everyone having electronic access to all their accounts, it is nearly impossible to resist taking a break, if not frequent breaks, to check on how your accounts are doing. Yet, if we want to be emotionally happier and have better financial outcomes with our investments, we need to train ourselves to avoid the temptation to look at our investments daily. Perhaps that is another hidden benefit of having a financial advisor, having someone who gives you long-term guidance while reminding you to ignore, as best you can, the short-term distractions.
Therefore, we can choose to follow the 24/7 news cycle and see the day-by-day changes in Greece or we can choose to watch the Fed daily for any signs of a rate hike. However, that will not make us better investors. First and foremost, what we know for sure is that no amount of analysis ahead of time is going to allow us to feel confident about future events being priced into the market. Too many examples of that being incorrect are available over the past 25 years of market history. Secondly, we can try to step back from the daily noise, follow the advice of a Nobel laureate, and check our investments and investment decisions on a much less frequent basis. I hope you choose the latter, as we will be watching the day-to-day for you. Have a great summer. Mike
Data source: The Wall Street Journal