It’s bound to be quiet next week around the Independence Day celebrations on July 4. The market closes at 1 p.m. EST Wednesday (July 3), is closed all day Thursday (July 4) and will undoubtedly suffer anemic volume on Friday (July 5).
So why should you drive yourself nuts surfing for news or churning stocks?
Trading too much leads to chronic underperformance. Consider a stunning 84% of active managers underperformed the market in 2011, proving in stark detail the advantage of hands-off indexing in a tricky market.
Market timing often can leave you out of rallies or put you in at a top, and given the crazy moves of June, it might be prudent to leave well enough alone rather than take this as a sign that you should tinker with your portfolio.
So instead of scratching that trading itch in this holiday-shortened week, here are five things investors would be better off doing with their time:
Look at every stock you own like it’s brand-new
We all get emotionally invested in positions: winners are treated like favorite children, underperformers give us ulcers, and we agonize over the possibility of getting out at breakeven.
But the million-dollar question for investors is whether they can get a better price tomorrow than they can today for their holdings. It ultimately doesn’t matter whether you entered Apple (AAPL) at $700 or at $70. The price tomorrow is based on current conditions and future outlook, not your personal experience with the stock.
So take some time and look at each pick like it’s brand-new. Do you think Apple is a buy at current prices with a chance to move higher? If so and you own it … then keep owning it. If you think Apple might drift sideways or even lower, then who cares whether you are sitting on a big profit or a big loss? Get out before the decline.
Looking at your stocks like they are brand-new is difficult, but allows you to make a choice based on the facts and not colored by the emotion of a profit or loss.
Take partial profits and rebalance
OK, so technically there is some buying and selling involved here. But rebalancing is not “trading” — it’s just part of a long-term investing strategy as a way to mitigate risk.
Let’s say you have 10 stocks with $10,000 invested apiece for $100,000 total. If one of those positions doubles and the rest move sideways, that one stock is now worth more than 18% ($20,000 of $110,000 total) of your portfolio instead of 10% previously ($10,000 of $100,000 total). It’s nice if that position keeps rising … but you’ll feel a lot of pain if it declines.
In other words, if you are holding Tesla (TSLA) or Netflix (NFLX), two stocks that have doubled in 2013, it might be time to trim back and move your money around. Because they likely represent outsized portions of your portfolio right now, and you should never have all your eggs in one basket.
Admittedly, selling a partial stake leaves profits on the table if the stock doubles again from here. But you’ll still at least have a foothold in that stock, albeit a smaller one, to profit — and the peace of mind that comes with redistributing risk shouldn’t take a back seat to greed.
Check relative performance of funds
If you’re a 401k investor or have ETFs in your retirement account, it’s easy to forget about the idea of relative returns in an up market. After all, if your portfolio is up 15% in the past 12 months, what do you have to complain about?
Well, the S&P 500 is up 20% in the past 12 months. The Russell 2000 is up 25%. So if you are in a large-cap or small-cap fund benchmarked to either of these indices, then you actually have a lot to complain about since you missed out on a portion of the rally.
No fund manager should be fired on a whim for underperforming by a few percentage points in the short-term. But it’s important to hold the powers that be accountable. If your manager chronically underperforms his benchmark, you might want to find a fund that is similar in strategy but boasts better returns.
Set price targets for use in the second half
Rather than invest based on the day-to-day churn, why not do some thinking about what a fair price is for your stocks — or for stocks you’re thinking of buying?
When the market is moving quickly, it’s much harder to keep your emotions in check. Calculating a good price in the cold light of day will make it easier to trade amid the volatility this summer — and to do so with confidence. So take some time this week to identify some laggards that you might cut loose if they drift lower or some bargain buys you would be eager to snap up at low prices … even if the headlines try to sway you from those targets.
Heck, you could even take things a step further and make the trades trigger automatically based on your targets.
The risk, of course, is that volatility could put you in or out during a big move that only lasts briefly. So think carefully before setting and forgetting an automatic trade.
However you execute this move, it’s important to think about your targets now before the market forces you to think about them at a very difficult moment.
Don’t panic, and enjoy the time off
In this volatile summer, headlines are starting to get ugly. But don’t buy into the doomsday hype — and remember that we’ve been through much worse in the past four years, but the markets have kept moving higher anyway.
I remain optimistic about the long-term prospects of the market, but even if you are concerned, it has been proven time and time again that trading too much is bad for your portfolio. Simply sticking with your strategy is often a better way to go than chasing your tail.
So while sticking your head in the sand is never a good idea, consider kicking back with a hot dog and enjoying your loved ones in this shortened holiday week.
Trust me, the market will still be waiting for you come July 8.