Financial Freedom SG

If you are like me, and I believe the majority of investors and traders, you want to look at how your stocks or the stock market indices have moved every day or even several times a day.

What if you watch it like a hawk every second? Would you do better or worse?

The book that I am reading now, Fooled by Randomness, by Nassim Nicholas Taleb gives a surprising answer.

The author runs a probability table which I reproduced below which assumes that you have a 15% return with 10% volatility(up or down) in the market. It shows that if you examine and trade in your portfolio once a year, you have 93% chance of success.

However, if you watch the computer screen flickering every second, you chance of making a success trade is a rather dicey 50.02%. Slightly better than 50%, which is quite intuitive from the assumptions, but pretty slim odds of doing well.

Table of Probability of Success at Different Time Scale (page 65 of Fooled by Randomness by Nassim Nicholas Taleb)

The author gives the advice to avoid looking at the fluctuations in stock prices too frequently because it is a mixture of noise and non-noise (or returns/losses).

Watch the stock screen of your portfolio 1 sec, 1 minute 1 hour or 1 day and you don’t do much better than 50% and get very stressed. Do it yearly and over 20 years you have one bad year for every 19 good years and you’d live a much less stressful life.

The longer the duration between looking at your portfolio, the less likely you over react to noise that push your portfolio down and issue a sell order. He goes on further to say that if there is significant news or event, like the meltdown of financial markets, he’d eventually know about it anyway.

So for the past few days, I have not been watching my portfolio values. But I know that the market is down and hence my portfolio. Have I done anything with the portfolio? Nope, and I found that I am more productive and focused on my tasks too.

Sources:

1. Fooled by Randomness by Nicholas Nassim Taleb.