Broker Check

Beware the Media Trap

| July 17, 2018
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Daily market news and commentary can challenge your investment discipline. When tested, consider the source and maintain a long-term perspective.

 

Unquestionably, living in the digital world, with its instantaneous access to information, has made us smarter and more empowered. In many ways, it has leveled the playing field for investors who now have access to much of the same information once only available to investment professionals. Information is so highly-valued that it is now being churned out 24/7, accessible on any number of devices people carry around. For investors especially, this should be a good thing, right?

 

Bad News Sells but it Can Hurt Investment Performance

 

Another way to look at this is, for people in general and investors in particular, too much information can make it more difficult to make rational decisions. With most of the population wired to the internet, information has become a commodity, pumped out incessantly by dozens of media outlets whose goal is to make its information more essential. However, to be essential, the stories need to provoke emotions and, the easiest emotion to provoke is fear. In the business of media headlines sell and negative or fearful headlines sell much more than positive headlines.1 

 

The barrage of headlines and hype around market events can lead to behavioral mistakes, like selling low in a panic or chasing returns with exuberance. It is likely one of the reasons why investors consistently underperform the market.

 

In the investment arena, stories can’t be compelling or entertaining unless they are consequential in the short term. The problem is, average investors typically don’t react to the events that might trigger a market move; they react to the market move. For example, in March, the Dow Jones Industrial Average plunged 700 points within a couple of hours as traders reacted to the threat of a trade war with China. By the time average investors could place a sell order or redeem their mutual fund shares, the damage had already been done. Coming on the heels of a 3,200, two-week plunge in February, the March decline sent financial commentators into frenzy, warning of worse things to come. Fear sells.

 

Bad News Has Little to do with Long-Term Investment Performance

What the media and punditry won’t tell you is that, while the news may be consequential in the short-term, it has little if any impact on the long-term.  While this month’s investment returns, or calamitous economic event may be consequential to our lives at the moment, their impact on the markets, and therefore, our portfolio over a 20- or 30-year time frame is so minimal as to cause nothing more than a tiny blip on your long-term performance. But, you won’t hear that from the media.

 

If you want to test the “expertise” of the media, tune in to your favorite cable financial news station the next time the stock market opens 300 points down. Watch as the pundits explain why stocks are down in the morning and then try to explain later in the afternoon why stocks are up 200 points. At the very least, it should raise the question as to whether they actually know what they are talking about. At the end of the day, what does it matter why stocks are up or down? It has nothing to do with the long-term performance of your portfolio.

 

Media Noise Can be Deafening

 

Clearly, we benefit from greater access to information. However, while the quantity of information has certainly increased, its overabundance raises the question of its quality. In the investment world, quantity over quality produces a lot of noise. It is especially important to realize that these sources of information don’t necessarily have your best interests in mind. While it’s important to stay on top of the news and educate yourself, you are better off if it’s done in the context of your own investment objectives and long-term strategy.

 

1Adweek.com. Bad news – negative headlines get much more attention. Feb 21, 1014

https://www.adweek.com/digital/bad-news-negative-headlines-get-much-more-attention/#

 

2Dalbar Inc. Dalbar’s 22 Annual Quantitative Analysis of Investor Behavior. 2016

http://www.northstarfinancial.com/files/6314/6523/9571/2016_DALBAR_Advisor_Edition.pdf

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