How the Financial Media Hurts Investors
Isn’t it interesting how human beings are drawn to drama? For some reason, we watch the news more when there is a crisis, tragedy, or natural disaster taking place. However, when things seem to be going well, we suddenly become uninterested.
This is precisely why the media, which includes the financial media, are always incentivized to spotlight or create a crisis.
This is bad for investors because it causes some to make poor investment choices out of fear. But, it’s fear that drives ratings and readership. Fear keeps us coming back to the television to listen to the financial experts. For some reason, we become addicted to listening to them explain what they think the future holds and how it will affect the stock market.
Always a Crisis
Therein lies a major problem. That is, no one, regardless of experience, connections, or intelligence can predict the future. But, we’ve seen many try to do just that over the years, in the face of countless headline crises.
Here are just a few of the topics that have flooded financial headlines (and some that still do) in recent years; the trade war with China, concerns over North Korea, Donald Trump getting elected President of the United States, Brexit, the U.S. National Debt, record-low interest rates, the “Fiscal Cliff,” the subprime mortgage crisis, natural disasters, the Iraq War, 9/11, and many more.
While these events were real events, and some led to actual, significant downward movement in the broad market, many were nothing more than a scare, which is exactly what the financial media is incentivized to do. In fact, despite my training, I can remember times that even I began to become concerned that we were on the brink of a major market meltdown. But, we weren’t.
Contrary to what you might hear, financial media outlets are not fiduciaries, they’re not looking out for your best interest, not giving insights for the sole purpose of helping you earn a higher rate of return. In fact, those things are likely not anywhere on their priority list. For them, it’s all about the drama because drama drives revenue.
The Rest of Us
For the rest of us, it’s good to be aware of what’s going on in the world, but it’s even better to be aware of what’s going on in your world. In other words, don’t try to manage your money based on things you can’t control, like North Korea, China, or interest rates. Focus, instead, on things that are in your control, like knowing your time horizon, minimizing risk through diversification, and keeping your investment costs low.
Why? Because there is always a “crisis” of some kind. Some of them could lead to negative returns. Many others will only be a scare. The problem is we don’t exactly know the impact each potential crisis will have, or when. That’s because we (investors, advisors, financial media personalities) cannot see into the future. It doesn’t matter how savvy someone may appear; nobody has yet mastered this feat.
So How Do You Navigate Uncertainty?
It’s easy for investors to overreact to market events or potential crises. A better approach is to develop a plan that accounts for massive amounts of uncertainty and stick to it. I believe people get into trouble when they invest and try to time the market. This usually results in them investing too aggressively or too conservatively for a short period of time, all in an effort to avoid or capitalize on major, short-term events.
But, short-term events have not changed the trajectory of long-term trends. In other words, even with major market events like the dot.com bubble, the 2008 real estate crisis, and many others, the broad market has continued to trend upward when evaluating long periods of time, which is the key to investing properly.
Stocks are long-term investments. When you evaluate stock performance over a short period of time, you could see a broad range of outcomes. That’s why we believe stocks are better-suited for long-term investing, compared to bonds, CDs, and money market funds, which are better-suited for short-term investing.
In closing, matching your investment allocation to your time horizon is incredibly important. In doing so, it’s crucial to understand the potential short-term volatility that could, and likely will, come from that allocation. Then, and only then, can you rest easy, ignoring the financial pundits and drama stirrers, and feel confident in your long-term picture.
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