I’m not kidding or exaggerating when I suggest that people ignore what the market does from day-to-day, month-to-month, or quarter-to-quarter.

As far as I’m concerned, two glances at my portfolio each year is plenty. Now, before you decide I’m completely crazy, let me remind you that I’m not alone. Some respected investors hold similar opinions:

“Try and avoid the worst hazards of behavioral investing. Follow the basic rule that I follow: Don’t peek. Don’t look at your account. Throw the 401k statement in the trash when it comes.” -John Bogle in an interview with Steve Perlstein.

“The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored.” -Benjamin Graham in The Intelligent Investor

Why not check more often?

I’ve always been of the opinion that information is worthless unless it’s actionable. So as far as I can tell, there’s absolutely no good reason to check your account value aside from during your scheduled rebalancing & goal assessment checkups. All that will come from extra checking is extra worry (and perhaps, therefore, a mistake you’ll regret later on).

Part of the reason I don’t check more frequently is that the bulk of our retirement accounts are invested in a “LifeStrategy” all-in-one fund from Vanguard that keeps our asset allocation close to where we want it.

However, from what I’ve read, there’s no predictable benefit from rebalancing more frequently than once per year anyway. So even if you do your rebalancing manually, there’s little reason to check your portfolio more than a couple times each year.

Staying Oblivious

Some people might find it difficult to avoid peeking at their account balances given the constant flow of news about the stock market. Here’s how I do it:

• I don’t read the newspaper.
• I don’t listen to the radio.
• I don’t watch TV.

(Though in all honesty, my reasons for removing those activities from my life has more to do with thinking that they’re a waste of time than it has to do with investing.)

What do you think?

How often do you check your own portfolio? Do you think you’d benefit from cutting back on that frequency? (And do you think you’d be able to?)

A reader writes in, asking:

“I always hear that ‘the market is right and has already factored in all relevant news‘ If that’s the case, then how do you explain times when the market plunged? And if the market was right when it plunged what should I have done? – stayed in the market or pulled my money out also since if the market was right I should also be going with the flow.”

The idea of an efficient market is that it factors all known information into investment prices. But it can’t know the unknowable. That’s why there are big moves (up or down) whenever a big piece of previously unknown information comes to light.

The hypothetical example often used is of a company whose fate depends on the outcome of a court case (e.g., whether or not the court strikes down a patent for their one and only product). If the court rules against them, shares of the company will be worthless. If the court rules in their favor, shares will be worth $100.

If the market estimates that the company has a 50% chance of winning the court case, shares of the company will currently be priced at $50. That’s the “right” price given the known information, despite the fact that the shares will obviously be worth either much more or much less in the very near future.

And the same thing happens at the overall market level. In late 2008, the market’s estimation of the probability that our economy would collapse went up dramatically — so stock prices fell dramatically. Once it became clearer that such an outcome probably wasn’t going to happen (at least not in the immediate future), stocks prices came back up.

Because an efficient market prices in known information so quickly, it only makes big moves in response to new information. In other words, if we assume that our market is efficient, the market’s current price and recent price moves don’t tell us anything about what the market is going to do.* What the market is going to do depends on what new information comes to light — something that’s, by definition, unknown right now.

So What Should We Do About Market Crashes?

When the market crashes, we don’t necessarily know it’s coming back in the near future. It’s possible that it could keep going down. So, how a given investor should respond to a crash depends on the investor’s situation.

• An investor with a high tolerance for risk (i.e., somebody who can afford to lose the money and who is comfortable with volatility) would rationally choose to rebalance back into stocks (that is, buy more of them).
• Investors with less risk tolerance might rationally choose a “do nothing” approach. That is, they don’t sell their stocks, but they don’t buy more either.
• Investors with very low risk tolerance (i.e., investors who cannot afford to lose any more money) could rationally pull their money out of stocks and move it into something safer such as a fixed annuity that promises to pay out regardless of what the stock market does. (Of course, one could make the case that this investor shouldn’t have had so much in stocks to begin with. But that’s a separate discussion.)

*As it turns out, there’s evidence that our market isn’t perfectly efficient in this sense. Over short periods of time, the market tends to exhibit a very slight amount of momentum, meaning that if yesterday was a down day, today is just barely more likely to be a down day. Profiting from this information, however, is rather difficult given how slight the effect is.

In the last week, the following questions (and several similar ones) have showed up in my inbox:

“With the recent downturn, I’m considering move my 401k to bonds until the market volatility stops.”

“I have a little cash to invest, but in light of the recent volatility, I can’t figure out where to put it.”

“When the news says the market is going nuts, I go in and check my portfolio. Then when I see a large loss I will get nervous. How does one overcome this scenario?”

Because I keep getting these types of questions, I suspect many of you have similar concerns as well. What follows are my four tips for dealing with the recent volatility.

First, give up on the idea that the volatility will stop. The stock market is always a bumpy ride. Sure, some months/years/decades are less bumpy than others. But even at times when the market has been marching steadily upward, there’s no way to know that a dip, a series of bumps, or even a cliff isn’t just around the bend.

As such, you only want to put money in the stock market if you’re OK with the fact that its value will bounce all over the place from day to day and from year to year. In other words, when designing your portfolio, choose an asset allocation that you can be comfortable with even during the most volatile periods.

Second, remember that underneath all this unpredictable, bumpy, noisy, random volatility is something valuable (and, for what it’s worth, much more predictable): A world economy that manages to continue growing despite setback after setback. If you’re in a position to be able to accept the accompanying volatility/randomness, you can have a share of that growth.

Third, remember that it’s all one portfolio. That is, even if one holding is doing poorly, there’s no need to worry as long as the overall portfolio is doing OK.

Fourth, try to keep a long-term focus. The value of your portfolio tomorrow is only important to the extent that you’ll be selling your holdings tomorrow. In other words, if you’re in the accumulation stage, it’s entirely irrelevant.

And for those in retirement, you’re (ideally) only liquidating a very small portion of your portfolio every year. What matters is the average price you’re able to get for your holdings over the entire duration of your retirement–not the price on any one particular day.

Updated to add: Taylor Larimore, one of the authors of The Bogleheads’ Guide to Investing shared a recent Barron’s article pointing out that, while we’ve had a volatile year so far, it hasn’t yet approached 2008 or 2009 in that regard.

• In 2008, there were 42 days in which the S&P 500 moved more than 3%.
• In 2009, there were 23 such days.
• So far in 2011, there have been only 7 such days.

I was recently asked how much time it takes to be a do-it-yourself investor (as opposed to using a financial advisor to manage your portfolio for you).

My reply was that it takes a considerable amount of time, which is interesting because the actual management of a do-it-yourself portfolio hardly takes any work at all:

• Rebalancing once per year is usually enough,
• Contributions (or withdrawals) can be set up to happen automatically, and
• Tax loss harvesting aside, there’s little benefit to checking your portfolio very frequently.

In other words, managing a do-it-yourself passive portfolio consists mostly of patiently, willfully doing nothing. (I’ve always liked the term “benign neglect” that John Bogle uses in his Common Sense on Mutual Funds.)

So Why Does It Take Work?

It takes work because in order to be successful over the long haul, you’ll have to educate yourself. You have to educate yourself so that you’re prepared for two challenges that will arise.

Challenge 1: At some point in time, your portfolio will perform downright miserably. (Exactly how miserably depends on whether you have an aggressive or conservative asset allocation.)

You need to be prepared for that. You need to know why you chose your portfolio in the first place, and you need to know why a period of lousy performance doesn’t necessarily mean you chose poorly.

Challenge 2: Over the course of your investing career, there will be many times when somebody (whether a broker, a financial advisor, your neighbor, an insurance agent, an author, or somebody on TV) comes along recommending a different investment strategy. And that person will have data showing that over some particular period(s), his/her strategy performed better than your own portfolio.

You need to be prepared for that too. You need to be able to spot the flaws in their arguments so that you don’t give in and swap out your entire portfolio every time someone comes along with a different suggestion.

Education is Inoculation

Educating yourself about investing works to inoculate you against both the doubts caused by periods of poor performance and the numerous alternative-strategy sales pitches you’re sure to run into over the years. The more you know, the safer you are.

In the last two years, one assertion I’ve heard over and over is that the stock market a giant Ponzi scheme — it only works if everybody continues to feed it money, and it collapses when people take their money out.

A similar assertion is that the stock market is just a “greater fool game,” in which stocks’ only value lies in the hope that you can sell them at a higher price to a greater fool at some point in the future.

Both claims are nonsense.

Stocks Have Inherent Value

If the public at large decided that they wanted nothing to do with stocks, and they all pulled out (and this is, to a lesser extent, what goes on in severe bear markets), stocks wouldn’t become worthless. Yes, they’d be worth less, but not worthless.

For the value of a stock to go to zero, the company itself has to be worthless. As long as a company has intrinsic earning potential, a share of ownership in that company has value as well.

A Worthless, Profitable Company?

For example, imagine if the price of Verizon’s stock declined all the way to $0.01 and that this decline was caused purely by investor panic. That is, it had nothing to do with any fundamental change in the profitability of the company. With a share price of $0.01, the company’s dividend yield (based on its most recent dividend) would be 4750%! Even if the price never went back above $0.01, you could get an obscenely high return from buying at such a low price.

Of course, such a scenario would never occur. The price of a company doesn’t ever go that low unless there’s a fundamental decline in the company’s profitability. At some point, investors would step in to snatch up the high dividend yield, thereby keeping the price from falling further.

Owning, Not Just Selling

Yes, companies’ earning potential can decline, or even go to zero. But it’s not caused by people getting scared.

Unlike a Ponzi scheme or a “greater fool” game, stocks have an inherent value. And they have that value even if there’s no “greater fool” to sell to, and even without investors continually pumping  money into the system.

Now, to be fair, stocks do have a ponzi-ish aspect to them, in that their market value does go down when other people pull their money out. But to assert that stocks’ only value lies in their ability to be sold is simply not true. You can receive value by owning stocks, not just by selling them.

Passive investors aren’t immune to the temptation to chase performance. We just do it by tinkering with our asset allocations rather than hopping between various actively managed funds.

For Example

Imagine two portfolios: Both have a 70/30 stock/bond split. Both have the same total costs. And both have identical holdings in the bond portion of the portfolio. The difference is that:

• Portfolio A is market-cap weighted, and
• Portfolio B overweights small-cap and value stocks.

Theoretically, Portfolio B should earn slightly higher long-term returns than Portfolio A because it carries slightly higher risk. Of course, there’s no guarantee those additional returns will materialize over any particular period.

All we know with certainty is that there will be some years in which Portfolio A does better and some years in which Portfolio B does better. And that can create a temptation to tinker: “Perhaps I should be overweighting small-cap and value stocks after all.” or “Perhaps I went a little overboard with the small-cap/value idea.”

However, picking either A or B and sticking with it is likely to beat the heck out of jumping back and forth between A and B, always moving to the one that’s done well over the last couple years.

Be Wary of Tinkering

The same thing happens with your allocation to REITs. Whether you allocate 5%, 10%, or 20% of your portfolio to REITs, there will always be years in which you wish your allocation was something different from what it is.

And with your U.S. vs. international allocation: Should 20% of your stock portfolio be invested internationally? 40%? Regardless of what you choose, there will always be some other allocation that’s done better.

Be wary of the temptation to tinker with your portfolio. It may be nothing other than chasing performance.

Or to put it differently: How we invest is at least as important as what we invest in.