No Market Quotation At All

It is completely reasonable to feel a sense of whiplash in the investment markets these days. One day, the stock market rallies a few percent on almost nothing relevant and the next day it gives back the gains for little reason. These daily gains and losses – as reflected below for the last 50 trading days – are not insignificant with roughly a quarter of the trading days experiencing a gain or loss of more than 2%.  

In many facets of life, it can be particularly valuable to step back and consider the big picture. This undoubtedly applies to investing where the noise of daily stock price movements or yesterday’s economic data creates distractions from what really matters.

Benjamin Graham, the father of value investing and perhaps the most influential investment mind of the 20^th century explains this in The Intelligent Investor (a book that Warren Buffet, Graham’s student at Columbia, describes as “the best book about investing ever written”):

The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.

One would be hard pressed to find better investing advice than the four sentences above.

The ups of the market inherently come with downs. Frequently, these ups and downs in prices are driven not by fundamentals but purely by investor sentiment and emotion.

What then is the best way to reduce portfolio volatility? Look. Less. Often. While that may come off as cavalier or insensitive, it could not be more candid and truthful.

Imagine for a moment that your home had a market price that updated intraday just like the stock market. In this world, you would almost certainly experience several days each year where the market price of your home declined by more than 10-20%. Not over the course of a year. On a Wednesday in April or a Tuesday in August. Simply because there were no interested buyers that day or because yesterday’s potential buyers changed their minds and backed away.

The irony is that most Americans perceive single family homes as a good investment largely because there is no daily price (FWIW, single family homes have historically been a lousy investment if homeowners spent time running the actual math as detailed here, here, and here) . Aside from monthly Zillow estimates – which many people brush aside as misinformed – homeowners generally only see two market prices over the course of their investment – the day when they buy their home and the day when they sell their home. Generally, years or decades separate these two points.

Many homeowners would lose their proverbial minds if there was an intraday market for their home and they could see the value fluctuate in real time – if they regularly watched the market price of their residence plummet by more than $100,000 from the prior day. Which it would. The number of potential buyers for any home is a miniscule fraction of the number of potential buyers for a liquid exchange traded fund (ETF). The basic economics here implies that the daily volatility of a home – if there was a daily market price – would be far, far greater than the daily volatility of a liquid investment portfolio. But because we avoid daily updates on the value of our homes, we irrationally think of these as solid, stable investments.

There are important lessons here when we think about assets such as stocks and bonds with market prices that fluctuate daily:

Mental Sanity

Start with the mental health benefit of following investment markets less frequently. As Ben Graham implies above, investors who turned off their access to market quotes would be spared the repeated mental anguish of regularly seeing their investments lose value. Looking at a portfolio of stocks at the end of each day since 1950 would have meant experiencing defeat about half the time (46% of all days). Alternatively, looking at a portfolio of stocks only once every decade during that stretch drops the probability of experiencing defeat to 7%.

Looking often at your investments is going to cause anguish about half the time. Regularly absorbing the daily financial news is going to cause anguish most of the time because news media leverages something called “negativity bias” – the known tendency of humans to respond more to threats and turmoil. Warnings of danger or prognostications of doom get more attention, more clicks, and more revenues for media companies. So, what we tend to get is far more bad news than good. More anguish and mental stress and loss of sleep – none of which are healthy for the human body. One of my peers has a good rule of thumb for life that is relevant here: “Don’t do things that make you feel terrible unless you have a very good reason.”   

Investment Performance Benefits

Second, robust evidence demonstrates that the more frequently investors review their accounts, the worse they perform. Why? Because investors who view their accounts more frequently are more likely to act and action tends to be counterproductive to financial success. In a famous research paper, two professors from the University of California were given access to anonymous transaction data over a multi-year period from thousands of accounts at a discount brokerage firm. They found that the stocks that investors sold outperformed those they kept by 3.4% over the ensuing 12 months. 

Another study done by Fidelity Investments separated investors into deciles based on how frequently or infrequently they logged in to view their accounts. Who had the worst performing accounts? The decile of investors who logged in most often. And who had the best performing accounts? The two deciles of investors who never logged in to view their accounts. When the researchers called the owners of these best performing accounts to better understand their ability to maintain discipline, they found that the overwhelming majority had either forgotten they had an account at Fidelity or that the original owner was dead and the estate assets were yet to be recovered.   

Less Noise = More Time

Finally, the daily and weekly and monthly movements of the market, the related explanations for why the market went up or down, and the predictions of why the market is likely to fall or rise next quarter do not matter to your financial plan. Let’s call all of this exactly what it is: Noise. We will again experience wars, recessions, terrorist events, pandemics, geopolitical threats, corporate fraud, and other scary conditions just like we did over the past 90 years when the S&P 500 Index provided a cumulative return just shy of 1.2 million percent.

Your time would be far better spent by connecting with people in your life, by going for a walk, by listening to music, by exercising, or by reading a book than by paying attention to financial noise.