Two articles in major U.S. papers today summarize the anxiety individual investors have been experiencing the past couple weeks. The Wall Street Journal reports today that retail investors are trading in and out of stocks at twice the rate of their normal level—and this during August, usually the sleepiest trading month of the year. Considering daily price swings of 3 or more percent in both directions, we suspect that everyone isn't simply rebalancing their portfolio.
And with the 2008 bear market still fresh in most people's minds, the New York Times can't help but compare the recent stock market volatility to that of 2008, complete with a chart implying stocks could fall another 25 to 30 percent.
Both of these stories underscore a cognitive bias that can hurt investors: the recency effect. This means we're hardwired to emphasize more recent events, and with 2008 still fresh on everyone's mind, we have suspicions that history will repeat itself, despite a completely different set of corporate earnings (strong so far in 2011) and economic data (weak in spots, but far from a guarantee of another recession). As difficult as it may be during volatile markets like these, taking a vacation from trading may be the best advice for the long-term investor.
Buy, Sell, Fret: Retail Traders Swing Into Action [Wall Street Journal]
Financial Turmoil Evokes Comparison to 2008 Crisis [New York Times]