The U.S.-China Trade War is making headlines, and the media know that we humans are psychologically wired to act – to do something when induced by fear, which is why they strive to deliver hyperbolic content to make it sound more important than it is. But just how important can these headlines or news stories be when it comes to your investment portfolio?
Unquestionably, we have all benefited from greater access to information – whether through digital media or 24/7 cable. We are more informed and more empowered. However, for many people, trying to keep pace with the constant barrage of information can be like drinking water from a firehose.
Information has become such a high-value commodity that the media must pump out as much as possible. As an investor, the overabundance of information can actually do more harm than good for your portfolio, especially when you realize the media don’t really share your agenda.
Bad News/Headlines Sell More Ads
The media needs to sell advertising to make money and, to sell more advertising, it must make its content more essential so it will capture the attention of a larger audience. In the financial realm, the way to make content more essential is to ensure it stokes emotions – primarily fear. According to Adweek, bad news or negative headlines sell more than good news or positive headlines.
The media know that we humans are psychologically wired to act – to do something when induced by fear, which is why they strive to deliver hyperbolic content to make it sound more important than it is. But just how important can any headline or news story be when it comes to your investment portfolio?
It’s Not the Headlines that Threaten Your Portfolio – It’ How You React to Them
What the media won’t tell you is, while a news event may be consequential at the moment, it is not likely to be of any consequence in the long-term. When the market crashes, it may impact your psyche at the moment. But it is unlikely to have any impact on the long-term performance of a properly constructed portfolio with a 10 to 20-year time horizon. For investors, it’s not a particular news event that threatens their portfolio; rather, it is how they react to the news event that is the real threat.
For example, when the news broke in March 2018 of the threat of a China trade war, the DJIA fell more than 700 points within a couple of hours. Even if it made sense to sell in reaction to the event, by the time investors could get their sell orders in, the damage was done. The problem for investors is, by the time investors receive the information, it has already been disseminated in the market which is then triggered by automated selling. For investors trying to react to a severe market move, it’s like trying to hop on to a moving bus.
In the two weeks following the trade war threat, the market plunged another 2,000 points, giving investors more time to flee. However, in doing so, they would have missed out on a 3,000 point rally over the next six months. And, in the year since the March 2018 plunge, the market has gone on to reach new highs before its recent pullback. If you listened to the media then and even today, they would have you believe that the decision to impose tariffs on China would lead to an economic Armageddon. Yet, in the year since, the economy has experienced its biggest growth surge in more than a decade.
You can conduct your own test of the veracity of the financial media. The next time the market opens 300 points down, watch how the pundits try to explain why in the morning. Then, when stocks recover and finish the day up 200 points, watch as they try to explain why. At the end of the day, it isn’t important whether stock prices are up or down because it has nothing to do with your investment returns over the next 10, 20 or 30 years.
The Media Noise is Deafening
Investors are better served by developing a healthy skepticism about the news and focusing on sound investment principles:
• Don’t sell into bad news. It’s already baked into the market before you can act. And, for the same reason, don’t buy on good news.
• Don’t follow the herd – it will likely lead you over a cliff
• If you want to take some profits, use them to rebalance your portfolio to your target allocation
• Don’t try to time the market; it will prove you wrong most of the time.
• Stay focused on fundamentals and concentrate your portfolio in companies with a strong track record of profitability, high returns on equity, low debt levels, solid earnings growth, and shareholder-friendly management.
While it’s important to keep up with the news, you need to keep in mind that you have no way to control the events of the day (i.e., trade tensions, tax policy, interest rates, market movements, the weather, etc.). You are better served by consuming information in the context of your long-term investment goals and invest for your own reasons. If you see something in the news that unnerves you, sit down and take a breath because this too shall pass.