Dan Solin over at the Huffington Post has a blog post entitled “The Secret to Investing in Volatile Times.”  The secret:

Instead of watching the breathless reporting from the floor of the New York Stock Exchange, do the opposite. Ignore the financial media. Pay no attention to what is happening in the market. Be blissfully ignorant. Spend the time you might normally devote to these anxiety-producing activities on pursuing your hobbies, spending time with your family and taking a vacation.

Once you understand that monitoring the markets is harmful to your long-term returns, a whole new world of opportunities will await you.

Because long term returns are higher under a buy and hold strategy, you will have greater peace of mind and higher returns, if you just ignore the market’s gyrations and try to time it.  Obviously your broker, who is in part motivated by commissions, isn’t too keen on this strategy, nor are newsletter writers and analysts with a good track record of market timing.  Bob Brinker and Marty Zweig come to mind.

Generally market timing is a fool’s game.  Burton Malkiel studied stock market efficiency, which says that the prices in the stock market reflect all known information at the time.  Generally the stock market returns can be modeled as random walk and guessing at the points when prices reverse is nearly impossible to do, i.e., technical indicators aren’t reliable, nor does doing fundamental analysis, because the information will be reflected in the prices by those with an opportunity to arbitrage.  So if you should just buy and hold, how should you invest?

Harry Markowitz, developed a method for constructing optimal portfolios, the method for which was enhanced to account for risk tolerance (the Sharpe ratio).  This is the basis for most of the new robo-advisers, where you answer a series of questions to gauge your risk tolerance and then the robot constructs an optimal portfolio that is supposed to return the greatest risk-adjusted rate according to your risk tolerance.

That is great, but what if I am saving for more than just retirement, such as a boat, the kids’ college tuition, etc.?

Well, the academics have a solution for that too.  We haven’t seen it make its way into the robo-adviser products yet, but certainly a human adviser can use the tools of both classic portfolio selection and lessons from behavioral finance and, rather than treating the person as a single pot of money to be invested in one portfolio, the concept of mental accounts can be used to construct optimal portfolios for aspirational investing (that boat or Porsche), college funds and retirement funds.

So back to Solin.  Solin is only partly correct.  You are best ignoring the market hype, but only if you have a well diversified portfolio that is optimized for your level of risk tolerance.  If you can’t sleep at night, you’re taking too much risk.