We recently went through a three-week news nightmare with the October government shutdown. But that was by no means the only stress-producing news event that investors have been subjected to in recent years. Just to name a few, there was the presidential impeachment of 1999, the war in Iraq that began in 2003, Hurricane Katrina, the European debt crisis, the 2011 downgrade of U.S. credit and any number of other events that have captured the headlines.
And as far as investing goes, what do all of these events share in common? Nothing and everything. Nothing in that they all are all independent and share no common cause or consequence. Everything in that the long-term effect on your investment portfolio is in fact this — zero. Unless you were unfortunate enough to let yourself get caught up in the moment and react.
If you did, it would be understandable. The fear and stress produced by the constant 24-hour news cycle makes it extremely difficult to psychologically tune out the distractions and noise and stick to an investment plan (why bother when it seems that the end is nigh?). So, it is quite understandable that for many, the news influences, and in some cases even guides, actions. But, as rational as that may seem, here’s the hard truth about the news and the effect it has on investment markets. The news we see and hear is anything but. It is backward looking. If you are hearing about it on the public airwaves, it has likely been already been priced into the market.
Investing is about looking forward. It is about what will happen, not what has happened. As it turns out, the vast majority of news is absolutely irrelevant to a well-thought-out and disciplined investment program. While it is informative and at times even entertaining, in no way should it be the basis of any investment decisions.
And while we’re on this subject, here’s another pitfall that the news can inflict on investors:The news we watch can greatly influence our thought process by reinforcing a bias we may already be harboring. That is, if you’re predisposed to a particular outlook, you most absolutely can find an outlet or story to reinforce that view. But this is not a good thing. As it turns out, searching out stories and outlets that reinforce an already formed point of view make it nearly impossible to maintain “ruthless objectivity” — an attribute quite helpful for long-term investment success. The investment markets neither know nor care about your biases.
Even historically significant events such as Pearl Harbor, JFK’s assassination or the attacks of 9-11 — when examined through the lens of the investment markets — reveal something amazing: While there can be an adverse, knee-jerk reaction to the event in the financial markets, once the initial shock has passed, we find that the markets generally resume their prior trend.
The end-of-the-world bet has been a loser since the beginning of time. It’ll happen one day, and when it does, game over. But until then, look forward. Develop and maintain an efficient and economically diversified investment portfolio, designed to handle the slings and arrows of life. Yes, the markets do sometimes rock and roll. But a thoughtfully designed, diversified portfolio comprising independent asset classes should be expected (within reason) to handle a variety of external economic influences and outcomes. So long as each individual holding has a positive, long-term expected return, you want holdings within your portfolio that zig while others zag. That generally makes for a smoother ride. While you may never be the jackrabbit in the race, such a portfolio at least allows you a chance to finish. And to even have a shot at winning, you must first of course finish.
If you have such a portfolio in place, then good for you — you should be well on your way.
Maintain your discipline, and let your portfolio do its work. Remember this: As Mike Tyson once said, “Everyone has a plan until they get punched in the face.”
Don’t let the news of the day be that punch.