Ostrich

DEFINITION of 'Ostrich'

A colloquial term that refers to the tendency of certain investors to ignore bad news that can affect their investments. In the investment context, "ostrich" is based on the popular misconception that when this large bird senses danger and cannot run away, it buries its head in the sand. Similarly, investors who exhibit ostrich-like behavior prefer to ignore negative news, which could have a significant impact on their investment portfolios, in the hope that the problem will simply go away. While this is an extremely passive approach to investing, it should be noted that the ostrich effect is not exhibited only by passive investors, but by active investors as well.

BREAKING DOWN 'Ostrich'

An ostrich does not actually bury its head in the sand when confronted by danger, but flops to the ground and remains motionless. This passive behavior exacerbates the danger faced by the ostrich, since it becomes an easy target for a predator who is not fooled by this feeble attempt to play dead.

Likewise, investors who act like ostriches when faced with market risk – which is unavoidable – or by stock-specific risk could see their investment losses multiply if they do not “get their heads out of the sand” and take remedial action. For example, investors who chose to ignore the barrage of bad news that accompanied the 2008-09 global bear market would have suffered declines of more than 50% in their equity portfolios. Although these steep declines occurred in a relatively short time period, they did not occur overnight. While an active investor may have been successful in escaping part of these losses by trimming equity exposure before the worst of the market declines, an ostrich investor would have simply ignored the news about the bankruptcies of financial institutions, the global credit crisis, etc. and stayed fully invested.

Ironically, this buy-and-hold behavior can actually benefit an ostrich investor who holds blue-chips over long time periods, since they remain invested through good times and bad. Continuing with the above example, an ostrich investor who stayed with blue-chip U.S. equities through the 2009 market lows and subsequent rebound would have reaped the benefit of a 150% advance in the S&P 500 from March 2009 to September 2013.

But while ostrich behavior can actually pay off if one is invested in blue-chip stocks or an index over the long term, it can take a huge toll on a portfolio if an investor has substantial exposure to a speculative stock or sector. An investor who has 20% or more of his or her total portfolio invested in a speculative stock should monitor this exposure carefully, with a view to cutting losses and salvaging at least part of the amount invested if the investment does not work out. Sticking one’s head in the sand may cost the investor dearly in this scenario.

RELATED TERMS
  1. Behavioral Funds

    Definition of behavioral funds.
  2. Passive Investing

    Passive investing is an investment strategy that limits buying ...
  3. Blue-Chip Index

    A stock index that tracks the shares of the top-performing publicly ...
  4. Active Investing

    An investment strategy involving ongoing buying and selling actions ...
  5. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment ...
  6. Blue-Chip Stock

    A blue-chip stock is the stock of a large, well-established and ...
Related Articles
  1. Investing

    Ostrich Effect And Passive Investing

    Learn how to take a hands-off approach to your portfolio without sticking your head in the sand.
  2. Personal Finance

    The Wall Street Animal Farm: Getting To Know The Lingo

    Finance professionals speak a different language, but the terms they use are more familiar than you think.
  3. Retirement

    Is Passive Investing Effective for Retirement Savings?

    Learn about the differences between active and passive investing for those approaching retirement. Discover how passive investing is gaining popularity.
  4. Trading

    Investors: Rely On Your Gut

    Find out how your personality and natural instincts can direct your investment choices.
  5. Trading

    10 Tips for the Successful Long-Term Investor

    These guiding principles will help you avoid common folly during the decision-making process.
  6. Markets

    Sand: The Abundant yet Scarce Natural Resource

    Sand, a basic natural resource, is so much in demand that its supply isn’t able to match up.
  7. Trading

    Removing The Barriers To Successful Investing

    Learn how to stop using emotion and bad habits to make your stock picks.
  8. Investing

    Value Investing: Common Alternatives To Value Investing

    There are dramatic differences in the ways different types of investors make their investment decisions. In this section, we'll look at some of the most common investment philosophies and see ...
  9. Managing Wealth

    Equity Investing For The Buy-And-Holder

    The buy-and-hold investment strategy requires investors to disregard their emotional responses to market movements.
  10. Trading

    Why Rational Ignorance About Your Investments Might Really Be OK

    It's impossible to know everything about the markets. Find out how ignorance affects your investments.
RELATED FAQS
  1. How do I determine what percentage of my portfolio to invest in blue chip stock?

    Learn how to determine what percentage of a portfolio should be invested in blue-chip stocks. Understand what strategy is ... Read Answer >>
  2. What is the benefit of investing in blue chip stocks?

    Learn what blue-chip stocks are, what attributes blue-chip stocks have and how investors can benefit from an investment in ... Read Answer >>
  3. What are the drawbacks of a small investor buying blue-chip stocks?

    Understand what a blue-chip stock is and learn about the drawbacks a small investor might face when investing in blue-chip ... Read Answer >>
  4. How should young people invest in a bear market?

    Learn strategies young investors can implement during a bear market that present the greatest opportunity for long-term investment ... Read Answer >>
  5. What is the difference between passive and active portfolio management?

    Understand the difference between active portfolio management and passive portfolio management, and how each strategy benefits ... Read Answer >>
  6. What are some of the limitations of only looking at the rate of return for an investment?

    Learn why only reviewing the rate of return for an investment poses a risk to the investor and what additional factors should ... Read Answer >>
Hot Definitions
  1. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  2. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  3. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  4. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  5. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  6. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
Trading Center