Too Much Information?

Too much information running through my brain
Too much information driving me insane
–The Police

The more you trade, the worse you do. This has been demonstrated in repeated academic studies over various time frames. Why does it work this way? Because the human brain is wired to do exactly the wrong thing at the wrong time in the stock market.

As our clients know, a core part of our investment philosophy is keeping a long-term perspective. When we purchase a stock, we intend to hold it. While it is difficult to calculate exactly, our average holding period is probably in the 4-6 year range.

Earlier this year, I chuckled when I saw there is now an iPhone application for mobile trading. As I have told some of my friends, do you really need to be able to place trades from your child’s soccer game? And shouldn’t you be watching the game anyway? Is this the type of logical, well-thought out investment decision that will enable you to select and hold a diversified portfolio of assets to help accomplish your financial goals? No! It caters to short-term thinking, which is often destructive.

So imagine my horror when I saw a commercial last week on CNBC for automated trading. Now you don’t even need to initiate the trade from the soccer field. You can select some strategy from a menu, set up your trades, and then go off to work. When you come home, your email inbox will have your trade confirmations and you can see how you did. While you’re at it, why not add some leverage by way of margin to help get wiped out sooner?

As I see it, the underlying problem is the constant media barrage of information telling us that we need to do something. You can watch financial news 24/7 these days, and every channel is urging some sort of action. But these experts are not talking about things like risk tolerance, what mix of assets is appropriate for a particular situation, how much you need to save in order to retire, and how much you can spend from your portfolio in retirement. Your financial plan is at least as important as your specific investment strategy, and perhaps more so.

There are many strategies out there, some good and some bad. But being able to liquidate your portfolio poolside, or trying to trade your way to riches without knowing anything about the companies you are buying sounds like a disaster waiting to happen.

Bill Hansen, CFA
August 13, 2010

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