A boring stock market can be a risky one; here’s why

The most common complaint about the stock market in recent weeks is how dull it’s been.

After a stumble to start the year followed by some April turbulence, stocks have mostly been drifting listlessly higher, recently inching to a low-drama all-time high. Even the pullback over the past few days has been orderly, contained - boring.

So what’s a trader to do without sharp market moves to knock loose buy-and-sell opportunities, and give an indication of the crowd’s hopes and expectations? Traders gotta trade, right?

Well, not necessarily. Kelli Keough, senior vice president for client experience at Charles Schwab Corp. (SCHW), says the calm environment has left active-trader clients content to sit tight and wait for a proper excuse to make a move.

Related: Stocks "getting into dangerous territory": Komal Sri-Kumar

“Many people think the [low] volumes are a negative thing,” she says in the attached video. “But the reality is, the market has been going up. There hasn’t been a catalyst for them to change their portfolios dramatically.”

While low volatility is often seen as the foreboding stillness ahead of a storm, Schwab clients are watchful without being outright worried. They remain “net buyers” of equities. “The biggest fear of our traders is fear of the unknown,” Keough figures. “They don’t know what to fear. So there’s a bit of unease.”

Related: Investors still leery of stocks 7 years post-financial crisis

In a May survey of Schwab's active-trader customers, 25% said they were bearish on the market outlook over the next six months, up from just 10% self-described bears in December. This seems to reflect the turbulent conditions that knocked around some of the winning trades of 2013, such as biotech stocks, high-growth technology and small-cap shares.

Schwab, the largest discount brokerage firm with close to $2.3 trillion in customer assets, offers an expansive window on investor activity. Keough said she tracks client flows in exchange-traded funds to gauge portfolio tilts, and has recently seen more money flowing toward international-stock funds and safer fixed-income vehicles.

A PhD in social psychology who was a professor at University of Texas at Austin before turning toward a finance career, Keough helps in coaching traders in hands-on ways to overcome inherent behavioral habits that can undermine trading success.

Among the principles she emphasizes with clients:

-Investors should recognize that trading inevitably invokes emotion, which can lead to poor decision-making.

-Humans exhibit “loss aversion,” experiencing about twice as much pain from losing money as we feel pleasure from an equivalent gain. This can lead to hanging on to losing trades and selling out of winners too early.

-Memory can beguile a trader, retaining positive experiences more readily than unhappy ones, potentially leading to dangerous overconfidence.

To counteract these impediments of the human mind and nervous system, Keough advises that traders should try out a trading plan on paper detailing entry prices, expected returns and preset exit levels, and track all trades in a disciplined way.

Calm times in the market are a pretty good time to hone such practices, which should come in handy once the tape turns “interesting” again.

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