Never mind keeping up with the Kardashians, keeping up with the stock market is exhausting enough! One moment we are on a sugar high and everything is fine. Then the next, it is as if the world is about to end.
Typically financial professionals do not recommend putting too much weight in financial news. A lot of fast news reporting tends to be factually incorrect, full of quick opinions and more a source of entertainment and sometimes, even fear mongering. It is a bit like fast food. Sure it may fill you up but it is likely not the best source of nutrition for your body. One may even begin to wonder if there’s an ulterior motive at hand.
Investors tend to find it challenging to stomach short-term losses and thus, will avoid taking on additional risk by allocating fewer dollars to riskier securities. Such actions are called “myopic loss aversion”; its role in behavioral finance should not be underestimated. Market commentators know this and unfairly prey on those who are none the wiser.
Jim Cramer springs to mind. He recently encouraged investors to start buying stocks as “we’re almost in oversold territory” & “Today, the market turned against everything but the soft goods stocks … That kind of move tends to only last for three days, and this was day two”. To put this into perspective, a Kiplinger article from 2016 showed from Aug. 1, 2001, through to March 31, 2016, S&P 500 index performance returned 126.1%, including dividends versus Cramer’s Action Alerts PLUS subscription service portfolio return of 64.5%. Cramer’s portfolio was also 5% more volatile than the S&P 500.
Enter Benjamin Graham’s famous parable, Mr. Market. He is an imaginary person created by Benjamin Graham in his book “The Intelligent Investor” to explain the behavioral psyche of the stock market and can be described as a manic-depressive, arbitrarily alternating between feelings of optimism to moods of pessimism. The key take away from the parable is although prices fluctuate, it is more important to look at the big picture and ignore the noise of Mr. Market’s knee jerk, day to day reactions. An example of this can be seen from the below chart showing asset class performance over the past 15 years. We can see that asset class performance varies from year to year, let alone from day to day.
Given Mr. Market’s bipolar personality and the cookie cutter, one size fits all suggestions afforded by some media outlets it is best to adopt a neutral stance when it comes to market news. Appreciate market commentary for what it usually is, entertainment, and what it is not fiduciary advice. It is best to seek market news from trusted sources. Besides, it is usually best to make informed decisions after gaining insight from a competent financial professional rather than “hot takes”.
It’s important to establish an investment philosophy (hopefully coupled with a sound financial plan) and be disciplined enough to stay the course. Diversification is an important part of this as it encourages prudent asset allocation amongst different asset classes ensuring appropriate exposure in line with an investors risk tolerance and financial goals. Contact FJY today to explore your investment options.