Wednesday, February 2, 2011

The case for ignoring the stock market

A great article by Carl Richards in the NYT about why you should ignore the day to day ups and downs of the market.   Well worth a read.  In the article Carl also links to some of his earlier articles which further expand on the idea that following the daily gyrations of the market is a bad idea for most investors.

Carl also likes to draw cute little diagrams on napkins that convey investing wisdom.  For example...

Brilliant stuff.   

Carl is of course correct in my opinion.  There is no reason why a normal person should pay any attention to the market.   If you've created a well diversified retirement portfolio, then you don't need to tweak it every week - and you absolutely don't need to alter the allocations because of some short term market movements.  

Most people who trade regularly and attempt to time the market are delusional about their own abilities.   They suffer from the "illusion of control".  Just because you can trade in and out of stuff doesn't mean that you actually have any real control over the outcomes.  All it really means is that you want to waste away your wealth on fees and commissions.

Having said all this, if you enjoy trading stocks, then by all means treat it like a hobby.  Put aside some money that you are willing to loose and trade to your hearts content.  But don't trade your retirement portfolio.

HT: Felix Salmon