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Earnings season kicked off with a bang Friday.
Better-than-expected earnings from J.P. Morgan sent financials flying higher and the S&P 500 within striking distance of its all-time highs.
As the reporting season heats up next week with the potential for increased volatility, Michael Batnick, director of research at Ritholtz Wealth Management, is warning of a common mistake investors should avoid.
“We’re all loss averse, meaning that we do not feel losses and gains equivalent. It’s said that losses are felt twice as powerful as an equivalent gain so if we know that to be the case, what we should do is try and limit how often we see losses and the way that we can do that is to really not look at our portfolios as much as we might be inclined to do,” said Batnick said Thursday on CNBC’s “Trading Nation.”
Avoiding regular check-ins on a portfolio’s performance prevents investors from feeling the anguish of day-to-day swings and roundabouts and from any irrational decision-making on down days, Batnick said.
“If you check your portfolio on a daily basis, there is a 46% chance that you’re going to see a negative return on a daily basis,” Batnick said. “If you have the chutzpah to only look once a year that dropped to 26% of the time. So that is something that is actually in our control and I know it’s difficult and it’s tempting especially when the markets are down but that is reinforcing potentially dangerous behavior.”
If avoiding the temptation to check regularly is too difficult, Batnick has another piece of advice for investors worried over earnings season volatility.
“If you are actively trading, you can’t worry about what the market might or might not do because that is totally out of our hands and trying to predict it on a day-to-day basis is really a fool’s errand,” Batnick said. “But what you can do if you are actively trading is you have to manage your risk.”
One way to do this is through position-sizing, he said. For example, if an investor wants to risk 1% of their portfolio’s capital, but will only allow a holding 10% downside, that position should be no larger than 10% of the total portfolio. If an investor is willing to give a holding 20% downside, then it should limit that to a 5% position of their portfolio.
For the long-term investor, it comes down to knowing your risk appetite and tuning out the daily noise, he adds.
“If you are actually invested for the longer term in individual stocks, maybe then focus on the business, focus on the fundamentals, and don’t get distracted by the gyrations and the day-to-day movements,” he said.