When it comes to investing, there’s no shortage of information at our fingertips every minute of every day. While following the media can provide an overall idea of how the market is trending, it can also be outdated, short-lived, or even nonsensical and based on rumors. But who do you listen to?
Many news outlets have incentive to draw viewer attention with wildly bullish (Market is Headed Up!) or bearish (Market is Falling!) predictions, which is why investors tend to only hear about ‘looming’ market doom or ‘imminent’ market growth. This type of engagement is designed to tap into our emotions (fear and greed, to name two), but emotional investing is often an exercise in bad market timing. Even though many of us can immediately call to mind the adage, “Buy Low, Sell High,” this is exactly the opposite of what can happen when we base our investment decisions on emotion. See illustration below for the psychology behind a stock market cycle. (Source: Charles Schwab, 2013)
The euphoria felt when the market is doing really well can lead to buying investments when they are most expensive, and the despair experienced when the market has made a significant drop can lead to sell their investments at a loss. The notion that many market participants buy at the top and sell at the bottom has been proven by historical money flow analysis. (Source: Investopedia, 2022)
So what do we do with the flood of urgent investment warnings and tempting calls to action? Selective attention is the term that researchers use for the process of limiting which data we choose to focus on. This can help protect important things from being overwritten by less important pieces of information.
FUN FACT Scientists have measured the amount of data that enter the brain and found that an average person living today processes as much as 74 GB in information a day (that is as much as watching 16 movies), through TV, computers, cell phones, tablets, billboards, and many other gadgets. Every year it is about 5% more than the previous year. Only 500 years ago, 74 GB of information would be what a highly educated person consumed in a lifetime, through books and stories.Frontiers, June 2017
When tempted to make a radical change to your investment portfolio based on loud and provocative headlines, look to some fundamentals
Drown out the noise. Market movements are notoriously difficult to predict. The media outlets that scream the loudest are not always the most accurate. The fallout from attempting to time the market in response to one of these predictions can be dangerous to your portfolio.
Look, but don’t stare. While it’s important for investors to know the performance of their accounts, short-term market fluctuations can be quite volatile. While the probability of realizing a loss within any given day is high, the likelihood of realizing a loss historically decreases over longer holding periods. Periodic review of your investment portfolio is necessary, but don’t let short-term swings affect your view of the future.
Stay focused on the long term. Investors who have taken the time to determine a sound investment plan based on specific goals and risk tolerances are best advised to stick to that plan. While it may not always grab headlines, a sensible, tailored investment plan is often the best solution to meeting your long-term goals.
Questions? When headlines are in a frenzy, tuning out the noise is easier said than done. Working with a financial planner can help you stay the course through market volatility, which often results in the best long-term performance returns.
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