Like most people, I don’t change my own oil. I have a vague idea that I could probably figure it out. I could watch some Youtube videos, buy one of those wheelie things you lay on, and keep a stockpile of motor oil and filters in my garage. After all that, I might save a few bucks, but not much more, and at the cost of my time. And if I screw it up, I might do some real damage to my car.
I’m the same way with home electricity, plumbing and roofing (though I’ve been known to DIY some bathroom tiles). Most of us know where our expertise lies, and smartly operate inside of it.
Except with our investments. I’d say that almost all of us think we have some kind of insight into the stock market, even if we’re loath to admit it at a cocktail party. We won’t fix our toilet, but we’ll buy some stock on a whim. I’d say we’re all guilty of market timing of one kind of another.
This idea came to me in a Valvoline waiting room. They had CNBC playing on the little 13-inch television. The three of us in the waiting room, unable to escape the television, sat and watched someone tell us how we were supposed to feel about the troubles in Greece while waiting to be up-charged on wiper blades.
I realized something then: all of us present were bright enough to not try changing our own oil, but not bright enough to change the channel. One of us might actually think that watching CNBC would help us decide when and what to buy or sell in our brokerage account.
For a mental exercise, let’s reverse the roles. Picture us all in the waiting room of a financial advisor’s office, watching car shows on television. Which of us would leave the advisor’s office primed to flush our own transmission fluid?
I should make this distinction: I’m not saying our ignorance of markets should send us out to the most expensive financial advisor we can find. We can and should learn enough about investing - or pay for inexpensive help getting started – to know what makes a truly solid strategy. And none of that strategy should involve watching the news and reacting to it.
Acting based on television coverage is dangerous in three distinct ways. First, in the case of Greece, the situation is ongoing. We don’t know how it’s going to end, and neither does CNBC (or the Greek Prime Minister, for that matter). Making investments because of it assumes that we either know, or are willing to bet we know, how it’ll all shake out. I promise that we don’t.
Second, most people are operating on investment timelines that are several decades long. For these investors, short-term crises don’t matter so much. Stocks may take a dive, but until money is needed, it’s just a number. I believe it’s most important to get asset allocation right and keep investing than to try jumping in and out of the market based on short-term signals.
Lastly, it will affect our behavior whether we know it or not. The most likely reaction to bad financial news isn’t a panicked sell; it’s something more insidious. Subconsciously, switches will flip in our minds. We’ll feel on a gut level that “this isn’t a good time to invest.” And we’ll drag our feet on investing, without even knowing it. We’ll forget to increase our 401k contributions and find other uses for our money.
The best option to fix this behavior may be to take our own sour instincts out of the equation. Luckily, developing a solid plan for investing can put your indecision to work in your favor, and automating that investment plan can help keep some of those sour instincts at bay.
Being an active trader is like being your own mechanic – a great idea if you have the time and inclination to become an expert. But most of us are better off in the waiting room, letting our mechanic, or our broad-based investment funds, do the work for us.