Watching Investments Closely Can Blur Understanding and Increase Sense of Risk

Monday, May 3, 2010

Last week left a bad taste in many investors’ mouths. The stock market’s Tuesday and Friday drops created a sense of uncertainty. After steady gains over the preceding weeks, doubt returned.

There is one factor that can accentuate this feeling of being at risk – and we can do something about it.

Studies have shown that our sense of investment risk increases the more frequently we watch what’s happening. The markets always seem to be boiling over somewhere. So, rather than gaining a better perspective, we end up seeing risk ballooning. Naturally, emotions respond and the potential for investing mistakes rise.

For example, last week the Dow Jones Industrial Average (DJIA) declined ‑1.7%, equal to the 1.7% gain the week before. If we played Rip Van Winkle on a weekly basis, there was little reason to worry.

But, if we checked daily, we would have seen these DJIA changes:

  • Monday  +0.0%
  • Tuesday –1.9%
  • Wednesday +0.5%
  • Thursday +1.1%
  • Friday -1.4%

And that’s only checking after the market closes each day. If we peek intraday or tune into midday reports, our heart rate can really bump.

As an example of what can be done, here’s what I have found that helps. I get an understanding of the stock market’s underlying trend without getting misled by its short-term volatility.

  1. I read my daily publications about the same time every day. I prefer early morning, before the market’s open. Because I am reading about yesterday’s market, I gain a daily perspective in a focused manner. I do not feel rushed and can take in the information in a more thoughtful manner.
  2. I don’t read or watch pre-opening reports. They provide minimal value to non-day traders. Also, they are often wrong in predicting the stock market’s opening.
  3. I rarely look at the markets while they’re open or listen to intraday news. Interim stock market reports have numbers attached that don’t evaporate or meld into one closing value by day’s end. Rather, they slosh around, creating a confusing mental picture.

So… The more often you look at your investments and the markets, the less information and insight you may gain. In addition, your perception of risk can rise.

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John Tobey on Seeking Alpha

Seeking Alpha Certified

May 2010