Beat Market Volatility by Being Boring

by Guest Contributor · 3 comments

riding the bear

This is part one of a guest post series from Monevator, a personal blog that provides money tips and motivation for private investors. You can find:

Stock market volatility scares many people off equities – especially in a bear market like this one.

Yet the vast majority of financial advisors agree that investing long term in the stock market is the only way an average person can secure enough capital to pay for a comfortable retirement.

To stick with equities through bad times as well as good:

  1. You need to believe in the long-term case for investing in equities.
  2. You need the right mindset to be put your commitment to investing in equities into practice.

Too many people discover that their intellectual belief in equities defers to their churning stomachs when they see their net worth rise and fall by thousands of dollars in a single day due to market movements.  As a result, they sell their stocks at the worst possible time when the market is down. Then, when the market has recovered, they regain their faith and buy at the peak. This pattern, like we know, will hugely cap your returns over the long-term.

To avoid it, I’d like to suggest three slightly counter-intuitive techniques to help you ride out, or ignore, volatility in your portfolio.

I’ll look at two strategies in follow up posts in this series. Today, I’d like to send you to sleep…

Strategy 1. Pick a boring online trading broker

Whether you invest through ETFs that track the markets or you buy specific shares in small growth companies, you don’t want your trading account to influence your decision making.

It’s all down to investor psychology. These brokers can damage your wealth by:

  • Flashing prices changes
  • Using color aggressively to show your gains or losses
  • Emailing information to you about your stocks performances

These are all dangerous features because they can encourage you to trade shares more frequently than you otherwise would. And several studies have shown that the more frequently you trade, the worse your returns.

To pick one report from the mid-1990s, Terrance Odean of the University of California, Berkeley, concluded that:

The poor performance of those households that trade frequently is generally consistent with the implications of recent theoretical models of investor overconfidence. Our central message is that trading is hazardous to your wealth.

It’s worth remembering that execution brokers make their money when you trade, not when you hold. It may be in their interests to design a platform that encourages you to buy and sell more shares, even if it’s not in your own interests.

So try to avoid brokers with too many bells-and-whistles.

My ideal trading account would look like a spreadsheet from the mid-1980s.  I haven’t found one as plain as that one yet, but we can all dream.

Editor’s Note: I totally agree.  Boring is good in investing.  What do you think?  Are you a flashy trader?

Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.

They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.

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{ read the comments below or add one }

  • SJ says:

    Boring is king. Boring, safe, unflashy chess,videogames etc… =)

    As for hedgint, is the avg. investor that bright?

  • Mark Wolfinger says:

    Boring may be fine as an overall concept, but why take unnecessary risk? Holding an unhedged portfolio of stocks works during bull markets, but it is far riskier than the average investor realizes.

    My point is that an investor can own ETFs (for example), but can intelligently hedge all (or part) of the portfolio by adopting conservative, boring option strategies. What baffles me is that so few investment advisors understand the power options have in limiting risk.

    If desirable, a position can be established that doesn’t have to be monitored more than once per year. Now that’s boring.

  • ObliviousInvestor says:

    Love boring. Vanguard is my selection for “best boring brokerage firm.” 🙂

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