The perception that day-to-day stock market volatility has increased may convince some investors that they should be trading within their portfolios frequently. Indeed, lots of stock market commentators love to talk about “the action this afternoon” and “what investors should be doing right now.” How about just sitting on their hands? It may come as a surprise but some of the savviest investors buy and hold portfolios for years without responding to the market’s daily fluctuations.
Mark Hulbert, whose newsletter tracks the performance of the investment newsletter industry, says the top newsletters don’t trade much at all. He recently analyzed the performance of 200 investment advisors who publish their trading and found that the top three newsletters, based on performance over 25 years, held stocks for an average of 3.2 to 7 years. “Their holding periods are about as far away from high-frequency trading as you can imagine,” Hulbert wrote in the Hulbert Financial Digest.
Another argument against not getting swept up in trading trends is compelling: investors who do so can easily get whipsawed by sudden reversals. For instance, what about investors who bought the day of the presidential election, when markets went up sharply, only to be caught in a huge downdraft the day after the election? Those who sold during the declines of the first week after the election may have missed the trading of Thanksgiving week, which was the best in six months.
Ben Graham, the father of value investing, often cited the image of Mr. Market, a schizophrenic fellow who offers you new prices, both higher and lower, every day. The investor has no obligation to ever accept and trade at any day’s price, but instead has the luxury of waiting until the price is right.
