Investing Mistake: Reacting To The Media

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Average investors are prone to taking action after listening to a financial news story. It is a mistake to react to the media for at least these ten reasons:

1. The news makes it difficult to distinguish between past, present, and future tense. Even when news reports that the markets went down (past tense), they make it feel like the markets are going down (present tense) and therefore will continue to go down (future tense). The present tense can be evoked by adding the word “today” as in “The markets went down 5% today.” Or the downness of the market can be implied by using a linking verb like “are” as in “The markets are down 5% off their previous highs.” Or it can be directly present progressive tense as in “What will you do now that the markets are going down?” In reality, past performance, even from a few minutes ago, has little if anything to do with future returns.

2. Financial news agitates our fear and greed. Neither greed nor fear creates strategic long-term investing success. Staying the course when an index is down is very uncomfortable in the short-term but usually the best course of action in the long run. Brilliant investment strategies are rarely the result of the emotions generated by the media. Emotional stories attract attention to sell advertising, often at the consumer’s expense.

3. News stories promote impulsive actions. To attract attention the headlines must pose in the guise of needs such as “Five portfolio adjustments you need to make now!” John Bogle suggests the opposite: “Don’t Do Something. Just Stand There!” One of the best ways to avoid action is not to look at how your investments are doing.

4. Watching financial news weakens our resolve. Even a brilliant investment strategy requires sufficient time to perform as expected. The continuous news cycle does not allow an investment strategy time to work. If you were to watch the news from ten years ago, you would realize how much of the news is simply wrong.

5. Watching financial news changes your risk tolerance in the wrong direction. In order to rebalance, we have to sell what has already gone up and buy what has already gone down. But when we hear that something “is going up,” we don’t want to be left behind. Our fear of missing out makes us want to buy before it is too late. And when we hear that something “is doing down,” we want to get out as quickly as possible. Our loss aversion keeps us from staying the course or better yet rebalancing.

6. Watching financial news confuses a promising company with a good investment. All of the wonderful news about good companies is already reflected in that company’s current stock price. If a company is expected to double their sales every year for the next three years, the current share price includes those projections. The share price could plummet even if the company does very well because it fails to meet the rosy expectations. Another way of describing this mistake is that investors mistake a good narrative with a future return. The more news you hear about a promising industry or company, the more susceptible you are to this fallacy.

7. The financial new media is is in the business of selling your attention to advertisers. Financial sites are too often selling your time and attention to the highest bidder. Sites with advertising are not trying to impress you with their wisdom. They are trying to impress advertisers with the fact that they can get you to click on their headlines. This is why they break a single article into three pages of text or a dozen slides in order to increase the number of page views that load advertising. Useless articles abound on the internet. Even worse, many are simply wrong.

8. The news appeals to common personality types. The analyst personality type represents about 7% of the population but about 49% of the financial planners. Financial news aims to appeal to the 93% of the general population who are not the analyst personality. As a consequence, the financial news will often contradict sound financial planning in favor of appealing to personality biases.

9. The media is in the business of reporting what is currently popular, not what is going to be profitable. Stocks that are “in the news” are more heavily traded. And no matter which way a stock is moving, if it is heavily traded it is less likely to be doing well. That means the stocks everyone is looking at and trading are not the best stocks for you to be holding. Buying, holding, and rebalancing an index is more likely to be invested in stocks that are not “in the news” and therefore have a chance to do better.

10. Watching the news is physically unhealthy. Not only is watching the new unprofitable, it is also physically unhealthy. According to experts, “It leads to fear and aggression and it hiders your creativity and ability to think deeply.” If you stop watching the news, you may be happier and more healthy. There is very little news that helps us reach our life goals or impacts our lives in a positive way.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)