Are You An Ostrich About Investing?
As the stock market approached and then broke through the 15,000 mark, did you get a little obsessed with your 401(k) balance?
You would not be alone. A novel research project recently analyzed how often investors went online to check their 401(k) accounts and found that they did so more often when the Dow was rising. What could be more pleasant than watching your wealth grow?
The researchers quantified the emotional roller coaster that our investments can take us on by looking at log-on activity during 2007 and 2008 for 100,000 401(k)-style accounts at Vanguard Group Inc. To make sure they were properly measuring investor interest, the sample included only online customers who did not receive paper statements in the mail.
Their analysis gauged how responsive these investors were to stock market swings in either direction, based on the size of one-day market moves. If the Dow increased by 1 percent in a day, for example, the total number of log-ins rose nearly 2 percent. But if the Dow fell by 1 percent, then 2 percent fewer investors checked their accounts.
This human inclination to avoid the pain of losing money has been labeled the “ostrich effect,” because investors respond by putting their heads in the sand when the market is down.
Here’s who is most likely to exhibit this behavior:
- Men. They also generally log on more often than women.
- People with investment portfolios of $500,000 or more. The market’s ups and downs have “more emotional saliency” for investors with more at stake, the researchers said.
- Investors with a higher share of their portfolios in stocks than in bonds.
- Investors with less money invested in index funds. “Passive indexers may be less emotionally involved with their portfolios,” they said.
There was a limit to the power of this ostrich effect – this limitation appeared at times during 2008, a year when the Dow plummeted 34 percent. No investor will ever forget that. But during the final months of the year, as the media provided virtually around-the-clock commentary about the terrifying financial crisis, more people actually logged in.
Explaining this anomaly, the researchers said that “curiosity about highly visible crises” may have gotten the better of even the ostriches.
Click here to read this paper by Nachum Sicherman at Columbia University, George Loewenstein and Duane Seppi at Carnegie Mellon University, and Stephen Utkus of Vanguard.
Squared Away readers: are you an ostrich?
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I honestly don’t think it’s investors “putting their heads in the sand when the market is down.” It’s more like poking their heads over the wall when the market is up. Most account access is not to inform decision-making. It’s just to take a look, and we’re more likely to take a look if we think it’s going to look good.
No one likes to see their portfolio go down. That’s why people choose to ignore the problem rather than face it head on. I think the bigger problem here is the fact that people aren’t doing what they should when the market is down – taking advantage of it! Buying stocks and funds “on sale” is a great time to bump up your 401(k) contributions or snatch up more shares of a company that you have a lot of confidence in.