Sometimes a writer resorts to dirty, underhanded tricks to catch the reader off guard. Spoiler alert: you’ve been had! I chose the headline above specifically because I knew it would grab your attention and lead you astray. Let me explain.
Many people think that the purpose of mass media is to inform the public of important facts, or maybe to teach the public something useful. The reason people believe this is because that’s exactly what the mass media has been diligently working to get them to believe. Never forget that the true purpose of mass media is to sell mass media. Can it inform and/or teach? Certainly. However, can it also misinform and/or misrepresent the facts? Can it be laden with unsubstantiated opinions disguised as facts or draw conclusions that are completely without merit? You bet your bottom dollar it can. And, if you use mass media as the basis for your investment decisions, betting your bottom dollar is exactly what you’re doing.
The blog headline above suggests that it would be wise to adjust your investment portfolio based on what you hear on the news. This presupposes that what you hear is true and accurate. It also presupposes that there are benefits to be had by doing so. I would like to suggest that both of those things are wrong.
“Dressing” Your Portfolio
Let’s imagine that the news is like the weather forecast. Professionally produced by teams of people with advanced college degrees, years of experience, and enough computing power to make Steve Jobs jealous. Let’s also imagine that each day, you “dressed” your portfolio to take maximum advantage of the weather forecast. Over the course of a few months or years, how often would your portfolio benefit, and how often would it be dressed in totally the wrong clothes? Wouldn’t it be better to have a portfolio that is designed to withstand all kinds of weather?
Let’s look at some recent real-world examples. At about noon on Monday, January 23, 2017, the following headline appeared on CNBC.com: "As of midday trading Monday, the S&P 500 was set to log its worst day of the year, as President Donald Trump's brash words and anti-free-trade moves appeared to spook investors." Sounds bad, right? The writer of that headline used sensationalism (“worst day of the year”) to exaggerate something and create fear. January 23 was only the 14th trading day of the year. The writer could have said the “worst day in the last 2 weeks”, but that doesn’t sound nearly as bad, does it? Next, the S&P 500 was only down about 6 points at the time that headline was written. Technically speaking, a 6-point loss might have been the “worst day of the year”, but that’s because almost all the other days of the year had been positive. Lastly, how could any logical person believe that it is possible to know what is or isn’t motivating investors over such a short time period (1/2 day)?
Here is another example. On Wednesday, January 25, just two days later, the Dow Jones Industrial Average closed above 20,000 for the first time ever. A new record high. This headline appeared on CNBC.com: "S&P zeroes in on 2,300 as the postelection rally chugs along". Stocks closed solidly higher, lifting the S&P 500 index and Nasdaq Composite to record highs of their own for the second day in a row. Hmmm. That sounds pretty different from the headline two days ago.
Should you Listen to Monday or Wednesday
So, which headline are you supposed to believe? Is the stock market crashing or is it chugging along? Do investors like Trump or not? How should you be changing your portfolio in response to rapid changes like these?
Guess what? These are all the WRONG QUESTIONS to be asking! The answers to these useless questions, even if you could possibly know them, have almost nothing to do with your future financial success or failure. The only correlation you should draw is that the more you pay attention to headlines like these, the more likely you will be focusing on the wrong things and the more likely you will not be achieving your goals.
What should you be focusing on instead? You should be identifying, quantifying, and prioritizing your goals. You should be assessing which of your behaviors are supporting those goals and which ones are detracting from your progress. You should be monitoring your steps and holding yourself accountable along the way. These things are extremely difficult to do by yourself. I recommend working with a non-emotional third party who can help you make increasingly smarter and better financial decisions over time.
Stop paying attention to the “noise” and consider professional guidance from someone who can help you develop a sound strategy that aligns your money, your risk tolerance, and your personal goals.