How Short-Term Thinking Can Short-Circuit Your Portfolio

Many investors think they are being diligent when they continually check in on how their stocks are doing, but Validea CEO John Reese says they may actually be hurting themselves over the long term.

“The urge to beat the market every day is hard to keep in check … particularly in today’s world,” Reese writes in his latest column for “In the past decade it has become exponentially easier to keep an eye on how your stocks or the broader market are performing — forget day-to-day market updates; now you can get a minute-to-minute, or even second-to-second update on how every stock you own is doing. … [But] though many investors fret over day-to-day, hour-to-hour, or even minute-to-minute market moves, the truth is that these short-term fluctuations on the whole really aren’t that meaningful.”

Reese says research in the field of behavioral finance supports that contention. And he also offers data from a Validea research study, which looked at how five of the firm’s top-performing model portfolios fared on a day-to-day basis over the long term. The study found that, while these five portfolios have averaged annualized returns of 13.3% since 2003 — about triple the S&P 500 — they on average beat the S&P 500 on only about 52% of days during that span.

“This data is a great example of why you shouldn’t hyperfocus on your portfolio’s day-to-day fluctuations,” Reese says. “Portfolios with exceptional performance over the long term still have plenty of bad days. In fact, as you can see, they can have nearly as many bad days as they have good days. What’s more, our study found that some of the biggest up days came after a very bad day (or a few), as investors realized they’d overreacted to the downside. Bailing after the bad days can thus really hurt, because you don’t get those bounce-back gains.”

Reese also looks at five stocks that get high marks from his guru-inspired strategies — picks that he says won’t beat the market every day, but which do look like strong long-term plays. Among them: beaten-down pharma firm Questcor Pharmaceuticals.