With non-stop news you are continually inundated with information that may impact investment performance. Rather than improving your decision-making process, too much information makes it harder to make logical and rational investment decisions. It’s difficult to sort through the information to determine what is accurate and relevant to your situation.
The primary objective of most media outlets and their featured financial experts is to engage, excite and entertain you to hold your attention. They need a compelling story to obtain and keep your interest. Most news stories have an element of exaggeration and are based on short-term current events. This objective is in direct conflict with the long-term goals of most investors. Stories on common sense advice to meet long term investment goals don’t excite the audience and garner strong reviews.
The media is especially prone to exaggerate negative news. Bad things generally take place quickly resulting in exciting and easy to report stories. On the other hand, positive things happen over long periods of time and don’t make good, sensational news stories. Rather than making you better informed, negative news can cause greater worry, anxiety and concern. A common mistake is to read or watch a news story and react emotionally. People tend to overreact to negative information. We want to take action and feel as though we are in control of the situation
Negative information feeds our natural tendency to be risk averse. The pain we feel from losing money is greater than the joy we feel from making money. It’s common to overreact based on the fear of losing money, that may be triggered by a negative news story. Be proactive rather than reactive to avoid emotional overreaction to negative information. Take a breath and don’t make a move in the heat of the moment.
A long-term perspective is the best way to combat an emotional reaction to negative news or market volatility. Create and maintain a long- term financial plan that, with exception to annual rebalancing, only changes in relation to your long-term goals. Don’t deviate from your plan based on current events or short-term market fluctuations. News is based on what is happening today and not on what will impact your portfolio in the long run.
Understand your risk tolerance and create a portfolio with the appropriate amount of risk to meet your goals and temperament. The stock market will have years with negative returns and your portfolio should be structured to support your lifestyle and income needs when this occurs. Find the right balance that will enable you to stay the course, in all market conditions. Emotionally prepare yourself in advance to deal with the stress of a down market.Don’t stop watching and reading the news but filter the information as it relates to your situation. Most information that impacts long- term investment success is consistent and boring – it certainly won’t make the evening news.