Hate bad news? Who doesn't. However, some of us respond to an unpleasant development by ignoring it entirely -- what's known as "sticking your head in the sand," or what many people derisively think of as "acting like an ostrich."
This is rarely considered a positive trait. After all, you can't adapt and make changes by ignoring the situation.
But there are some indications that it might not always be a bad thing.
Who's an ostrich?
Are you male? Older? Lots of money in your account? Do you like to invest heavily in equities?
If so, according to a recent working paper, you might be more likely to act like an ostrich.
What does that mean? The authors found that ostriches (who tended to share the above characteristics) were more likely to ignore their accounts during periods of bad news. This tended to be a pretty stable trait -- even though 2007 and 2008 were very different with respect to stock market returns, ostriches tended to respond to downturns in the same way.
The trait also correlates to volatility: When the VIX (an index looking at predicted stock market volatility) is high, ostriches go into hiding.
Why should I care?
Ostriches tend to take more risks by investing more heavily in equities, which probably explains why they're a little bit more squeamish about logging on to their accounts when the market drops.
What's funny is that this isn't necessarily a bad thing.
If ostriches are avoiding their accounts when markets go down, it also means they aren't trading -- which could be a longer-term benefit. In other words, if putting your head in the sand gets you through a tough period, it could mean that you don't fall into the "sell low" trap that claims many investors.
As the authors put it, "To the extent that individual investor trading following market declines is empirically a losing strategy, ostriches may benefit from higher investment returns."
It also means there's a potentially positive use for our stubborn preference for good news over bad. And the sweet victory of knowing that plugging one's ears and singing "la la la!" isn't a universally embarrassing habit is just too good to ignore.
So how can you make the most of it?
One danger of being an ostrich is becoming overconfident. When markets are up it can be easy to start thinking of yourself as an unsung investing hero -- the ostrich's dark side, after all, is compulsively checking their account when times are good, and possibly even doing the happy dance.
Don't let the benefits of being an ostrich get canceled out by these tendencies.
One of the leading causes of underperformance in portfolios is overtrading, and that includes trading in rising markets. Not only does moving in and out of positions hurt your long-run gains, it introduces transaction costs that can be a fantastic way to undercut performance.
So if you find yourself wanting to ignore your 401(k) for a while when the market takes a dive, don't beat yourself up about it. Just make sure not to fall into the temptation of thinking you're George Soros when it goes back up again.
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