Now for those of you who read my blog regularly, I am hopeful that you realize this statement is sarcastic. For anyone else that was hoping to divine some great investment insight, I apologize for “luring” you in. I encourage you to keep on reading though. While it may seem quite silly to think about reallocating your portfolio due to one news event or the news of the day, there are many individual investors that succumb to this temptation far too often. Financial publications and the media can make it seem as though the recent news is so important that action is required. The vast majority of time there is really nothing that you should do at all. Sticking with an investment portfolio with an allocation that works with your risk tolerance and is built to reach your long-term financial goals is a great thing to do. Emotions and “noise” keep getting into the way of rationality for most of us.
Well, today’s news disappears very quickly for the most part. For example, all the financial pundits have been talking about how the Federal Reserve will begin to reduce its purchases of securities on the open market, the so-called “taper”. Additionally, the increase in interest rates on all fixed income securities is a constant topic of conversation. Unemployment and global growth still garner many headlines in the financial press and are talked about by various commentators. How important are these current events? I will never dismiss any opinions and news of the day. However, I have a couple questions for you: do you remember sequestration, the fiscal cliff, increasing tax rates on the wealthy, the debt ceiling, the financial crisis in Greece, the change in the US debt rating, and the falling level of the dollar? Do you remember subprime lending, Internet stocks, Long Term Capital Management, the Asian Contagion, and the bond market collapse of 1994? While the events in the last question may not be as familiar, the first question should ring a few bells. Each of the aforementioned topics was discussed for weeks, if not months, and how your entire investment portfolio would need to be radically changed. When is the last time you saw a story about the fiscal cliff? That story occurred back in December 2012, so it is not too far in the past. It dominated financial media and the mainstream nightly news for quite some time. Today’s news becomes a distant memory in our myopic society. Why?
I won’t try to answer that question from a philosophical or sociological standpoint. In terms of the financial markets, you need to remember that all investors have different timeframes (or what is referred to as time horizons). The financial media is geared toward traders, institutions, hedge funds, active money managers, and “investors” with short time horizons. What is a short time horizon? For most institutional money managers, the short term is measured in weeks, the intermediate term is months, and the long term is quarters. Some refer to it as the institutional imperative. Institutional investors and research analysts are usually judged by how their advice does over each quarter. Part of this is simply due to the fact that financial professionals usually meet with their clients on a quarterly basis. Clients come to them and ask: “Did I beat the market in the second quarter”? Furthermore, active money managers tend to market themselves based upon short term performance. There is a phenomenon where new investments flow to the so-called “hot hand”. When investment returns are superb in any recent quarter, new investors tend to flock to those asset classes or money managers. It just seems to happen over and over again.
If you have a financial goal that is five or more years away, you would be surprised how many financial professionals will adjust your entire portfolio based upon news events from my first question. Now it is easy for anyone to cherry pick for news that turned out to be insignificant in retrospect, I would argue that I am being quite fair. The news events from the second question are much more important. However, you must remember that they were once “today’s news” as well. The point I am trying to make is that major inflection points in the direction of the financial markets are quite hard to tell at any given point in time, but they also do not occur as often as the financial services industry would have you believe.
I will get a bit more specific around this point. I can remember when my ex-mother-in-law called me up incredibly excited. She had just been approved for a $525,000 mortgage to buy a home in Florida. Never mind that her annual income was slightly above $50,000. When did this happen? It happened toward the end of 2006. The weekly financial newspaper, Barron’s, ran a story over a decade ago in which it wondered if Warren Buffett had lost his investment touch. Should he be considered the Oracle of Omaha anymore? The story was printed in December 1999. BusinessWeek magazine published an article that declared the Death of Equities back in 1979. Of course, history has shown us that the real estate market crashed in 2008, Warren Buffett was smart to stay within his circle of competence and avoid high-tech stocks, and 1982 marked the biggest bull market in stocks ever. It is very often that the news of the day turns out to be contrary in nature. What I mean by this is that the conventional wisdom has held for so long that it may not hold for very much longer. Now there are varying degrees in terms of the time you have to act. For example, you may have heard the term “irrational exuberance” from Alan Greenspan, the Former Federal Reserve chairperson. What most people fail to realize is that Greenspan coined the term in December 1996. For all you market historians, the Internet Bubble burst in March 2000. Sometimes prescient observations take a long time to play out. The financial markets can be emotional and go to excess (both on the upside and downside) for far longer than even the smartest investors, money managers, and economists expect.
Well, what should you do in the face of news blasting at you every single day? My recommendation would be to assess your risk tolerance and determine your long-term financial goals first and foremost. Secondly, you can select an investment portfolio that will help work toward achieving those goals. In the meantime, I would strongly urge you not to pay attention to the day-to-day news events. The “vagaries and vicissitudes” of the financial markets in response to the topic du jour can be frustrating. A better way to spend your time would be to read a book that will help you understand the financial markets and investment in general. You also can visit Internet websites that provide information more than news. Here are a few that I recommend:
These are just a few of the financial websites that I visit regularly. Now I will never tell you not to go to certain websites. However, I will caution you that there are certain websites geared toward short-term traders and focus primarily on the news of the day. While this information can be important and is valuable, I have found that most investors tend to become more confused by gathering more data points and trying to keep up with today’s news. Remember that there are financial professionals (myself included) that are reviewing news events every hour of every day. It is nearly impossible to outsmart institutional investors by knowing more about the financial markets and individual stocks and bonds as they do. Your goal should be to educate yourself about investment options and focus on the news that affects you. If your time horizon is measured in years, news from any single day is rarely important to you. Seminal news events that affect the direction of the financial markets for a long time do not come along very often (e.g. bankruptcy of Lehman Brothers, October 1987 market crash, etc.). Focus on learning what might be happening today that may cause your investment portfolio to fail to meet your financial goals in the long term. Always ask yourself, will I be thinking about this day in 10 years? If not, there is a pretty good chance that it is not germane to your investing stance. Moreover, as you have seen from a number of my examples, major inflection points in the financial markets usually have a long lead time prior to something actually happening. Thus, you do have time to adjust your investment portfolio strategically in response to those types of developing stories.
If you would like a few books to read to assist you in your journey, I posted a list not so long ago. The list can be found at https://latticeworkwealth.com/2013/07/23/spend-20-hours-learning-about-investments-to-prepare-20-years-of-retirement-2/.