Making financial sense of “breaking news”
Joel Dresang: Art, the Securities and Exchange Commission is filing fraud charges against several firms for publishing misleading articles about investment opportunities. And at the same time, the American Institute for Certified Public Accountants did a survey that found that 63% of Americans find that there’s such misinformation out there that it prevents them from making financial decisions. What’s your take on that?
Art Rothschild: Joel, there’s a lot of information available to consumers, to investors, from a number of sources. And it is a problem that people can’t tell the difference between what’s accurate and what’s inaccurate.
Joel: The accountants survey found that 77% of Americans said that they think it’s important to react right away to breaking news.
Art: Joel, that’s a bigger problem. Reacting on an immediate basis to news that could potentially have only short-term consequences can ruin a well thought-out long-term investment plan. So the fact that investors are motivated to act quickly to information that may or may not be accurate, that really is a problem.
It’s most important to have a long-term perspective, when we’re making investment decisions. We’re investing in the stock market. You should design your portfolio so that you know you don’t need the money that’s in stocks for at least five years.
If you’re acting immediately to some news item, you’re quite likely potentially going to be making a mistake. So, you shouldn’t react or act too quickly, to any information, regardless of whether you think it’s true or whether it might be false.
Joel: So, what should long-term investors do?
Art: Long-term investors should always carefully evaluate the potential impact of any information they’re receiving on corporate profits and the global economy. Is the information they’re receiving going to somehow change the course of future corporate profits or change the course of future spending? Is it going to affect interest rates and earnings? That’s what we’re focused on.
The more you act, the more likely it is you’re going to make a mistake if you’re wrong.
There’s no better example of that than what happened in June of 2016. Investors drove stock prices higher early in the week when the pollsters, when the news, suggested that the British were going to vote to stay in the European Union. On that Thursday, they voted to leave the European Union. Anyone who bought expecting stocks to go higher were sorely disappointed when stocks lost significant amounts of money – $3 trillion dollars was lost globally on that Friday and Monday after that vote.
Now, if one would have sold in the midst of that selling, investors again would have made another mistake because stocks were significantly higher two months later. So, you have to be very, very careful about reacting to any information – even if it’s accurate – because you don’t know how it’s going to affect the long-term course of investments.
Joel: Would it be better for most investors just to turn off the news?
Art: If the news is going to cause you to get emotional, if it’s going to cause you to lose sleep, then perhaps you should turn off the news.
But to be a successful long-term investor, you have to be focused, you have to be disciplined, and you have to be deliberate in what you do. So no, you need all the information you can possibly receive to make good long-term investment decisions.
I think the best thing most investors could do when they receive information – whether they believe it’s accurate or not – is to think first. Determine what impact that information is going to have on the overall economy and the markets in your long-term investment plan.
Do not react emotionally. Do not react precipitously. Don’t do anything that will, on a short-term basis, negatively impact your long-term investment plans.
Look (and scrutinize) before you leap, by Joel Dresang
Crash test dummies, by Joel Dresang
”Investor Alert: Beware of Stock Recommendations on Investment Research Websites,” from the Securities and Exchange Commission
Stocks: Long-term, consistent returns, a Money Talk Video with Dave Sandstrom
7 tips for successful investing, a Money Talk Video with Marc Amateis
Focus on fundamentals to face volatility, a Money Talk Video with Steve Giles
(initially posted June 28, 2017)