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Your retirement financial security doesn’t depend on following the markets on a day-to-day basis.
In fact, you don’t have to follow them on a week-to-week or even month-to-month basis. You certainly can if you want to, but doing so is unlikely to improve your investment performance.
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This is important information any time of year. But we’re usually too preoccupied, and our pace too frenetic, for us to pay much attention to it. As we set goals for the new year, we would do well to reflect on how much of our lives we want to devote to following every company report and every squiggle in the market.
Earlier this week I came across a wonderful study that provides perfect fodder for this year-end reflection. The study explored a scenario in which traders had perfect foreknowledge of what’s coming down the investment pike—insight that you’d think would have been exploitable for great profit. In fact, the study found, this foreknowledge didn’t help very much.
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The study, by MIT accounting professor Chloe L. Xie, focuses on how much traders could profit if they knew in advance whether companies would be reporting earnings that were better or worse than the analyst consensus. You might think that conducting such a study would be impossible. But the occasion nevertheless arose because, between 2011 and 2015, a group of Ukrainian hackers hacked into the servers of the major business newswire companies such as BusinessWire, PR Newswire (now part of Cision), and Marketwired (now part of GlobalNewswire). These are the companies that many publicly traded companies use to distribute their earnings report press releases. The hackers were able to read drafts of these releases in advance of their being distributed to the market as a whole, and they executed more than a thousand trades based on that knowledge.
Amazingly, however, they did not make a killing, according to professor Xie. Sometimes their trades were very profitable, but not always. Overall, she found, they “performed poorly.”
How can this be? A big part of the answer is the stock market’s amazing efficiency. The market is a discounting mechanism, and it does a good job anticipating the future. To be sure, the market often gets it wrong in individual cases. But on average it’s hard to beat.
These results illustrate what we’re up against when we analyze every piece of news about a company whose stock we’re interested in, or read every report from a Wall Street analyst. If perfect foreknowledge leads to poor overall performance, how can it be realistic to expect that—with our im-perfect foreknowledge—we can do any better?
The gambling instinct
I fully recognize that, despite the results of this study, you may not want to stop following the markets. You still can, provided two preconditions are met.
The first is that you recognize that your obsession with the markets’ gyrations is a hobby. There’s nothing wrong with that, as there are many other pastimes that have far more pernicious consequences, both personally and socially. Problems arise only when you kid yourself that, by devoting huge amounts of energy and time to following the markets, you’re improving your retirement financial security.
The second precondition, related to the first, is that you immunize the bulk of your portfolio from any short-term speculative trading to which your daily obsessions might lead you. My preferred way of doing that was proposed decades ago by the late Harry Browne, editor of a newsletter called Harry Browne’s Special Reports. He recommended that we divide our investible assets into two portfolios—one Speculative and one Permanent. The former, which would contain only a small fraction of your assets, would constitute your “play” money with which you try to hit the ball out of the ballpark.
The Permanent Portfolio would contain the bulk of your assets and would be invested in index funds and held for the long term with little or no change other than periodic rebalancing. Odds are overwhelming that, over the long term, it will outperform your Speculative Portfolio. And its outperformance will not be dependent on closely following the market’s short-term gyrations.
Happy new year!
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
