Why its important for investors not to react to attention grabbing headlines

 

“There’s no news like bad news”. Elliot Carver, media mogul and villain in the 1997 James Bond Movie, Tomorrow Never Dies.

There’s no shortage of commentary on the state of the global economy and markets. And there’s no shortage of experts looking to predict the next recession or be definitive on when markets are going to fall. After all, bad news sells!

Here are some media headline grabbers from the last few years to demonstrate.

“Crash warning – Could your KiwiSaver get hit?”

This headline came from a New Zealand Herald article dated 30 Sep 2016 and if KiwiSaver investors had taken heed and moved to more defensive investment options, they would have missed out on significant returns. Here’s the proof. According to the June 2019 Morningstar survey of KiwiSaver funds, the average growth fund returned 10% per annum for the previous 3 years whereas the average conservative fund returned less than half of this, posting 4.9% per annum.

“Dow’s nearly 1,600-point plunge marks its biggest one-day point drop ever”

This 5th February 2018 emotive gem comes courtesy of CNBC. It may have been technically correct but the drop in the Dow didn’t even rank in the top 10 all-time one day percentage falls (percentage is a more meaningful measure). The 1,600 point decline (6.3%) didn’t come close to the worst one day decline of 22.6%. If investors had taken this headline grabber as a signal to get out of the market, they would have missed out subsequent growth in the Dow of around 8%.

“Could the Economy Tank in 2016?”

This headline came from Politico magazine on 3 January 2016. To be fair, the article didn’t categorically say the US or global economy was going to “tank” but it certainly had bearish tones. Here’s what actually happened. According to data sourced from the International Monetary Fund, in 2016 the world grew by 3.4% and emerging economies grew by 4.6%. Yes, the US like other advanced economies experienced softer growth of 1.6% but the US didn’t tank, nor has it tanked since.

Here’s the point. The media is in the business of selling stories and bad news sells. Words like “crash’, “plunge” and “tank” are emotive headline grabbers. The risk is that investors panic as a result of reading such articles (or maybe just the headlines) and bail out of investments rather than staying the course. But with a plethora of information and misinformation available to investors either through newspapers, radio, TV or online, who should investors believe and what should they do?

Firstly though, we don’t want to give the impression that its plain sailing. Economies move from expansion to contraction and back again. It is part of the normal economic cycle. Investment markets are dynamic and move up and down in response to a myriad of factors ranging from company specific factors through to large macro-economic themes and geopolitical events. Investor fear and greed plays a part as well. Sometimes markets will under or overshoot their fair value but as the graph below shows, they increase in value over time.

S&P 500 Index Growth Through Time

S&P500

Source: Macrotrends.net. Data is for the US share market (using the S&P 500 index) from January 1928 to August 2019, includes dividends, and is inflation adjusted. The grey lines show recessions is the US.

It is notoriously difficult to predict markets. If you’re lucky enough to pick the right time to get out, good luck at picking the right time to get back in. Investors have a habit of selling when asset prices are low (panicking after a market correction) and buying when they are high (waiting too long to gain the confidence to reinvest).

Here are five basic tips to help investors navigate the uncertainties of investing.

  1. Make sure you have enough cash, short term investments or regular income (e.g. through wages or salary) to meet your near term commitments.
  2. Ensure your investment strategy is aligned with your financial goals. If you don’t need the money for 10 to 20 years, you can afford to invest a higher proportion in growth assets (e.g. shares) but if your time-frames are much shorter you’ll probably want a greater proportion of your investments in defensive assets such as fixed interest which don’t normally experience the same ups and downs as the share market.
  3. Stay invested. You’re more likely to reach your financial goals by staying the course than trying to time the markets. You will also get to experience the “8th wonder of the world” – compound investment returns.
  4. Diversify your investments. Spread your money across a range of investments including asset classes and geographical regions to provide protection against poor performance from any one asset or sector. You’re likely to smooth out some of the ups and downs of investing as a result.
  5. Seek advice from a professional financial adviser. They can help you work out your financial goals and strategy to investing. They can also help you manage a portfolio of investments and remove a lot of the administrative burden. Importantly, they will counsel you to “stay the course” when you are tempted to react to those attention grabbing headlines


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