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Saturday, August 13, 2016

Daily Market Indicators not the Best for Investing

The market on a daily basis not be the smartest approach to understanding stocks and market changes. Investors often scour the Internet for news in order to determine if sales are down, trends are forming or market adjustments likely to occur. The problem with this approach is that it is too narrowly defined and doesn't leave enough perspective to effective long-term decisions.

Opening the paper and seeing stocks slightly down, home prices up, consumer spending increased, or any other marker indicator can blind us to what is actually occurring. Market indicators sway based on factors that are difficult to understand and decipher on a daily basis. This means that too much focus on daily market changes can lead to recency bias in decision making.

Recency bias occurs when a narrow focus on information leads to a belief that trends are formulating that were not necessarily found in long-term trends leading to poor decisions to buy, hold and sell stocks. When one steps back and sees the long-term trends they realize they cannot worry about the short-term but should focus more on the historical outcomes.

Stocks are specific. You either invest in this particular company or you don't. Large industrial investors regularly seek to invest in a battery of companies based on long-term trends. For example, if you believe cell phones will adapt and become even more important in the future the daily fluctuations are of less concern.

The method of picking stocks or making changes should not be so short-sighted that it forgets the benefits of holding. Short-term trades often result in loss based on cost and daily social trends that don't result in meaningful growth. Medium and long-term traders often do better as they search out developmental changes in products and mass social changes in product choices.

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