In 1988, Public Enemy released the single, “Don’t Believe the Hype”. Public Enemy encouraged listeners to be independent thinkers, to form their own opinions without basing them on someone else’s narrative. I stumbled upon this song while working out recently and I got to thinking about investing. Weird, I know.
When it comes to investing, behavioral finance is the buzzword. And for good reason! Research shows that investors are often their own worst enemies. There are many different negative behaviors that affect your investment performance. For the sake of this article, I want to focus on media response. Media response is when you react to headlines and “noise” without reasonable examination.
A look at a few events of the past year:
January gave us the worst 10-day start of market performance to a calendar year…ever. Let that sink in. In the history of investing, this was the worst 10 day start we have ever seen. This was mainly caused by plunging oil prices. Scary, isn’t it?
With the worst start to a year ever recorded, you certainly should have pulled your money out of the market, right?
In June, the British voted to exit the European Union. Most believed that there was no way that a majority would vote for exit, but 52% did. This hammered global markets for the days following the vote. U.S. markets fell over 3% immediately after Brexit. Headlines from June 24:
- World Stocks Tumble as Britain Votes for EU Exit
- U.K. ‘Brexit’ Vote Makes Tidal Waves in Global Markets
- Dow Industrials Tumble After ‘Brexit’ Vote
Global markets crashing? It was time to get all your money as far away from the stock market as possible, right?
In another shocking upset, Donald Trump won the presidential election on November 8th. Every poll had Hillary Clinton as the clear favorite. Dow futures immediately were down 900 points. Most assumed the market would panic because of the uncertainty of a Trump administration. With the whirlwind surrounding a polarizing election, you should have fled the market, right?
WRONG. In fact, as I write this article, the S&P 500 is up around 8.5% for the year. There has been a great deal of volatility throughout the year from three momentous market drops. Unfortunately, many people pulled their money out of the market when these events occurred. They saw the headlines and felt fear. That fear drove them to move their money to “safety” instead of leaving it invested. This is how media response sabotages the returns of investors. After each of these events, market fundamentals prevailed. Those that stayed invested have experienced positive returns for 2016.
What should you do?
When investing for the long-term, you should focus on what you can control. You can control your risk management and diversification. Outside of that, much is out of your control. If you’re comfortable with your risk exposure and diversification, short-term volatility shouldn’t concern you. Yet, far too many investors react to headlines. They overreact and make poor decisions based on fear. This robs them of investment performance. If you are one of these people I urge you… DON’T BELIEVE THE HYPE! Remember, headlines are marketing tactics. They want to invoke emotions and intrigue you enough to read an article. Stick to your long-term investment philosophy and don’t get caught up in the day by day market swings. Your portfolio and your sanity will thank you for it.