Ostrich effects

I'm always love to read Jason Zweigh column. This week he wrote about ostrich effects, no guts to face the fact their investments have gone down. He gives some good advice why you should not be running away and take steps to deal with it.

Experiments by psychologist Paul Andreassen have shown that the more news that investors get on their holdings, the more they trade and the lower the returns they earn. When your head is stuck in the sand, you can't open your mouth to trade.

But becoming completely information-averse isn't a good idea, either. Here are some prudent actions you can take when you would rather act like an ostrich.

Look ahead. Use your email or calendar software to send yourself a future reminder. Commit yourself to check the value of your accounts, not today, but one week or one month from now. When that day arrives, rebalance your portfolio, selling a portion of those assets that have gone up and buying a bit of those that have gone down. Also check whether you hold any stocks that you would not buy more of at their latest prices; sell them for a loss that you may use to reduce your taxable income.

Use the news. You should not, of course, stop reading this estimable newspaper. For an intelligent investor looking for timely buy ideas, the New Highs and Lows table in the Money & Investing section is alone worth the price of the paper; this Thursday, it offered a bumper crop of 656 new lows.

Be contrary. When the headlines are overwhelmingly negative, as they are now, the market tends to feel riskier than it actually is. (The time to worry is when no one seems worried, not when everyone does.) Take a few moments to go back in market history and see how stocks did after other periods of despondency like 2002, 1998, 1991, 1987, 1982, 1974 and so on. If history is any guide, your inclination to act like an ostrich is a strong indication that the market is about to turn into a phoenix.