Can ignorance be bliss?

In September 2008, just before all panic began to break loose in the markets and the economy, the SMI newsletter featured an article titled, Don't Look!: Blissful Ignorance Can Be Your Investing Ally. Key paragraphs:

Unless you just happen to like high levels of stress, it simply doesn't pay to follow the daily movements of your portfolio. Sure, it may seem like daily performance information is helpful, or at least not harmful. But most of us simply aren't wired to process significant swings in our investments without a commensurate swing in our emotions.

Emotional upheaval causes us to want to "do something" in response - something like "get out of the market until things settle down." Unfortunately, that kind of short-term emotional response almost always undermines the long-term appreciation of one's portfolio....

[T]he only time you really need to look at your holdings is when it's time to take a predetermined action that's based on your long-term plan, such as replacing one fund with another (as Upgraders do) or rebalancing your portfolio....

So if watching your portfolio go up and down has you all stressed out, the simple solution is to just look the other way - until your plan tells you it's time to look. When that time comes, check your holdings, take whatever action is needed (based on your plan), then get on with your life.

Chuck Jaffe at MarketWatch is offering similar advice in the wake of recent market volatility, including the early May "flash crash."

Combine too much information with too little confidence and you have a recipe for knee-jerk reactions....

"Our emotions are going to be affected by where our attention is," [said John Nofsinger, a Washington State University professor who studies investor behavior]. "And if our attention is on the minute things - the moment-by-moment or day-by-day - we will have a lot of swings. If our attention is on the big picture, we can breathe normally while the wild swings are going on."...

Experts in behavioral finance note that many investors move to [a day-by-day investing focus] as they age, as their financial recovery time shrinks and as they look out at the future and fear that maybe they will be the person whose retirement is put on hold because of one bad day....

Investors need to use events like [the May 6] meltdown to find the right "psychological distance" from the market - the range of emotions they can live with.

"You don't want to think the sky is falling all the time, but you don't want to ignore things and assume nothing can happen," [said Donald MacGregor of MacGregor-Bates Inc., a Eugene, Ore., firm that researches judgment and decision-making]. "You need to develop the emotional discipline to have a plan and stick with it, but also to recognize that market moves that didn't bother you when you were 25 might bother you a lot when you are 50 or 60."

This is why SMI's approach to investing involves carefully taking into account one's investing temperament and season of life when developing an investing plan. Doing so will help you adopt a plan you can stick with when the short-term news is unsettling.

To borrow a phrase from Ben Franklin (he used it in speaking of marriage): "Keep your eyes wide open before [investing], half-shut afterwards."
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Joseph Slife is a contributing author and editor for SMI. Learn more about Christian investing and finances at the Sound Mind Investing website.