Why Your Smartphone May be Hazardous to Your Portfolio

I am not a Luddite. I have had a smartphone since they first came out. I have upgraded mine three times since then. I use my phone every day. Every day? Heck, my phone and I are inseparable.  I use it for many of the usual reasons that most people use their phones: Texting, email, as a camera, monitoring my investments, etc. It seems like my phone is always in my hand, except of course when I’m driving. I use my phone for nearly every reason, but there’s one thing I won’t do with my phone: I won’t do any investing on my smartphone.

The Internet Changed Everything
The advent of Internet-based discount brokerage houses revolutionized investing. Individuals could now easily buy and sell stocks, bond, mutual funds, etc. on the internet for a fraction of what full service brokers were charging thanks to electronic trading. Along with lower pricing, e-trading also helped level the playing field. Spreads — the difference between the bid and ask prices — has been reduced dramatically; for many stocks, the spread is typically now just a penny.

You are just one click away…
Trading on your computer is incredibly easy. It is almost as easy as buying something on Amazon with their “Buy now with 1-Click” button. To me, trading in your investment account should not be as easy as it is. The decision to buy and sell stocks, ETFs, mutual funds,etc. should not be made without considerable analysis. The online brokers have made trading so easy, it encourages you to trade more often. Of course, the brokerage houses want you to trade more often as they make a commission each time you buy or sell securities. Buying and selling securities on your phone takes this to a new level.

Here’s a hot tip, buy Graphodextine!
For most of us, our smartphone is always close by. When we hear the tone indicating that we have a new text message, we start salivating, eager to see who just wrote to us. Instantaneously — even if we are in mid-conversation with someone else — we reach over to our phone to see who wrote to us and what they had to say. Here’s a scenario that likely happens every day. Imagine if that text message was from your close friend Bob and it said something like: “I have a hot tip for you. Buy Graphodextine right this minute. If you wait until tomorrow, you will be sorry!”

You’ve never heard of Graphodextine, but if your trusted friend Bob tells you to buy the stock right this very minute, you might be very tempted to execute a trade immediately. Good news! Your broker has an app that you downloaded onto your phone allowing you to make trades instantly. You can act on Bob’s hot tip. It doesn’t even matter if you are near your laptop or not, you can make that trade right this minute. I would never make that trade. I would never act on a tip without doing considerable research. Your smartphone is an enabler. It allows you to act impulsively. It allows you to make snap decisions.

Order extra bacon, sell shares of Domino’s 
It seems like today there are apps for everything. You can buy pizza on your smartphone. The goal of these apps is to streamline and facilitate the ordering process for you. What it seems that they have done is to find ways to separate you form more of your money. One study found that people ordering their pizzas online chose those with 33 percent more toppings, 20 percent more bacon and 6 percent more calories. While this study shows that people may make poor food choices, the behavior can easily be extrapolated to other actions, including buying and selling stocks. If it’s quick-and-easy to buy and sell in your portfolio, you are more apt to make decisions hastily.

The Sky is Falling
Do you really need to have ready access to your retirement investment account on your smartphone? Earlier this year, the stock market averages declined dramatically. Many media sources reported the carnage with headlines like these:

The market will drop 20% in 2016

– CNBC Jan 4, 2016

Stocks Tumble as 2016 Goes from Bad to Worse

– Wall Street Journal Jan 7, 2016

Stock market erases $1 trillion so far in 2016

– CNN Money Jan 12, 2016

Dow plunges 391 points as fear grips markets

– CNN Money Jan 15, 2016

Bad January a bad omen for stocks in 2016?

– Chicago Tribune Jan 31, 2016

Sounds ominous, doesn’t it? Here’s a chart of the S&P 500’s performance thus far this year. As you can see from the chart, the S&P 500 had declined by more than 10 percent in February. Since then it has rebounded, erasing virtually all of those losses and currently shows a decline of just 0.39 percent.

SP500 2016 ytd

Unfortunately, many people tend to sell shares when markets decline. This is particularly troublesome.  When people have ready access to their funds, especially their retirement funds, they may make hasty decisions. If you can sell your retirement investment from your smartphone based upon a few sensationalist headlines, you can impact your retirement investments dramatically. If you sold in February, you missed out on the rebound in March. This market rebound took just a few weeks. Technically, according to its definition, we are not in a bear market. Such markets necessitate a 20 percent decline form the recent highs to be considered a bear market.

How long does a bear market last?
The average bear market lasts 19 months and causes losses of 38 percent, according to the Leuthold Group as noted in an article in the Chicago Tribune. Usually, when the markets are at their nadir, people tend to think that such declines will continue indefinitely, but they don’t. Eventually, they rebound after the bear market take place, even after the Great Depression, when stocks fell about 80 percent, and after 2008 – 2009 financial crisis, when stocks fell 58 percent.

An investor with half of their money in the stock market (via an investment in an S&P 500 index fund), and half in long-term U.S. Treasury bonds, tended to recover such losses in less than two years. In the average bear market, the stock market climbs 48 percent in the first a year after the scariest moment in the decline, and 62 percent after two years.

If history has anything to say about the future, markets will recover after each and every decline. There’s no need to reach for your smartphone and react to your friend Bob’s urgent “buy now!” text message or react to all those doom-and-gloom reports from the media. Most of us are better off staying out of the deep end of the investing pool.

Buy? Sell? Put down the smartphone
You know you should strive to add as much money as you can into your retirement account(s). But sometimes it’s hard to ignore the day-to-day activities of the stock market, and the media’s subsequent reactions. If you feel the urge to grab your smartphone in response to such events, remind yourself that your investments are for the long term. After 30 or 40 years of steady investing, you will likely have more money than you can imagine. Stop using your smartphone to invest! If you feel the urge, simply order a pizza instead. While that might result in eating too many calories and impact your bottom, at least it won’t have much impact on your financial bottom line.

(By the way, the reason you’ve never heard of Graphodextine is that it doesn’t exist, I made it up; no need to start doing any research on it.)

 

Photo by JD Hancock

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