Reblog: A Bored Investor Is a Dangerous Thing

Last month was dull in the financial markets, even by the normally sleepy standards of August. The S&P 500 stock index didn’t move up or down by more than 1% in a single day all month, according to Howard Silverblatt, a senior analyst at S&P Dow Jones Indices.

Average daily volume of 6 billion shares was about 20% below its level from January through July, says Credit Suisse trading strategist Ana Avramovic. Not since 2010 has August been so much more sluggish than the first seven months of the year.

And therein lies the danger, since a boring market can prod investors into trying to do exciting things.

The categories of exchange-traded funds whose assets grew the fastest last month, according to FactSet, seek to double the daily return on telecommunications stocks, to earn the opposite of the daily return on energy companies and to hold real estate in China. Not far behind were funds that attempt to double or triple the daily return of gold-mining companies.

Just under $900 million poured into these groups of funds last month. By contrast, investors had taken $205 million off the table at these funds in July. Even as the market appeared to be sleepwalking, funds betting on higher volatility grew in size by more than 20% in August.

These aren’t investments; they are speculations dependent on guessing which direction prices will twitch next or finding a buyer with an itchier trigger finger than your own.

So-called leveraged funds, which amplify the gains — and losses — of markets, and inverse funds, which move in the opposite direction of the indexes they track, can be explosively risky. And Chinese real estate doesn’t remotely resemble an undervalued asset.

So this is a good time for investors to remind themselves that an idle mind is the devil’s workshop.

Scientifically speaking, boredom is a mildly unpleasant state of mind usually triggered by a monotonous environment. Experiments have shown that it can increase your heart rate and raise your levels of cortisol, a hormone associated with stress, says James Danckert, a cognitive neuroscientist at the University of Waterloo in Ontario, Canada.

Fixating on a dull market can leave you restlessly craving excitement that just isn’t there.

There’s another possible danger. “Boredom might be catching,” says Robert R. Provine, a psychology professor at the University of Maryland, Baltimore County. “We know that yawning is highly contagious.” (By the time you finish this paragraph, the mere glimpse of that word “yawning” might have you stifling a yawn.)

A bored investor is probably more likely to succumb to the whims of other bored investors moving in a herd, Mr. Provine says.

All of this is true for professional as well as individual investors. In his classic book Where Are the Customers’ Yachts?, published in 1940, Fred Schwed wrote: “Your average Wall Streeter, faced with nothing profitable to do, does nothing for only a brief time. Then, suddenly and hysterically, he does something which turns out to be extremely unprofitable. He is not a lazy man.”

So, whether you invest for yourself or work with a financial adviser, it’s important to resist the pull of action for action’s sake.

“Go to a continuous-process factory sometime — a chemical plant, a cookie manufacturer, a place that makes toothpaste,” the investment consultant Charles Ellis once told me. “If you find anything interesting, you’ve found something wrong.”

He added: “Investing is a continuous process too. It isn’t supposed to be interesting….If you go to the stock market because you want excitement, then sooner or later you will lose.”

Finally, research shows that people tend to blame their boredom on their environment rather than on themselves. If a dull stock market bores you, is that the market’s fault? Or is it your own, for paying too much restless attention to it and for not finding something better to do with your time?

If the stock market feels too quiet for your tastes, don’t try to spice it up with your portfolio. Try to spice up the rest of your life instead. You’ll be happier — and less likely to lose money when the market gets exciting again.

Source: The Wall Street Journal

This blog post is authored by Jason Zweigh and appeared on the Wall Street Journal. You will find the original article here.