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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.
What if houses were like stock?
Taking a break at work, you click on your favorite financial Web site to check the price of your home.
When you looked at 9:30 a.m., it was at $300,000. But then bad news hit. A dog relieved himself in the yard. The next-door neighbor who was expected to cut his overgrown grass decided to sleep off a hangover. A bird flew into a downstairs window, leaving a small crack.
The community learned about those devastating events while you toiled away on TPS reports for your boss. When you checked your house’s price at 11:30 a.m., it had plunged 4 percent.
Other worried neighbors began to panic, putting their houses on the market for discount prices. You stayed calm at first, but kept checking
That scenario is unlikely, as there’s no place to check housing prices so frequently. But it’s common when the asset is stocks.
When the U.S. stock market closed July 19, the Standard & Poor’s 500 index was at 1,553.08. This past Wednesday, exactly two months later, it closed at 1,529.03. That’s just a 1.5 percent drop. Investors who didn’t check their portfolios in between wouldn’t think much of it.
But what if you check stock quotes multiple times a day? During these two months you would have witnessed the market fall 10 percent before recovering.
Psychological studies have shown that humans feel the pain of a loss more profoundly than the pleasure of a gain. That may have led many investors to bail out just at the worst time.
There is no doubt that stocks are a more volatile investment than many asset classes. Money market accounts, CDs and bonds all offer a virtual guaranteed return of principal. Stocks don’t come with that assurance, so they’re not the right place for short-term funds. But over time stocks almost always beat bonds, whose supposedly safe returns are eaten up by inflation.
Much of the reason stocks are perceived to be risky is because price quotes are so widely available. The more often you monitor your portfolio, the riskier stocks seem. If you check prices only every few months or so, chances are they’ll seem a lot less volatile–much like the value of your home.
It’s easy to caution investors to ignore stock market prices in the short term, other than to watch for bargains. But it’s another thing to actually tune out the bad financial news we’re hit with nearly every day. A better strategy is to read investment classics and learn how to replace emotions with rational thought.
This lesson of focusing on long-term performance can be learned in a surprising place: fantasy baseball. Every season there is some topnotch player who flounders out of the gates. A good example this year would be Garrett Atkins of the Colorado Rockies.
Atkins hit .329 with 29 homers and 120 RBI last year. After the first third of the 2007 season, Atkins was hitting .223 with three homers. With 10 days left, Atkins was up to .295 with 23 homers and 103 RBI.
In other words, Atkins in the long term performed pretty much as expected. It’s just that 90 percent of his production came in the season’s last four months. Similarly, stock price increases tend to come in bursts.
For the buy-and-hold fantasy baseball “investor,” it made no difference when Atkins put up his numbers. The point is he did it eventually. Only the person who panicked and “sold low” on Atkins in early June would be kicking himself.
As is true for stock investors during the recent market stumble, it wasn’t easy for Atkins owner to keep the faith in April and May. He was probably flooded with lowball trade offers. His emotions might have told him to trade Atkins.
The informed owner wouldn’t sell low. The stock market investor who understands the value of what she owns won’t sell just because Mr. Market is temporarily undervaluing her company.
So next time you start stressing over a market drop, think of Garrett Atkins.