As I write this the Alibaba IPO began its first day of trading. If you somehow missed it, you’ll probably hear about it later today or tomorrow. It may be on the screen at the gym. You’ll turn on a radio and there it is. It seems impossible to escape the financial news. You might even ask yourself, “Why should I care?” The answer is, you probably shouldn’t.
The point is that we’re bombarded with all kinds of “information” that is supposedly making us more informed about markets and investing. The ‘news’ usually focuses on telling us what has happened. It certainly doesn’t help inform us of what is likely to happen. One study (Tetlock) concluded that expert forecasters do no better than the average member of the public, i.e., expert predictions are no better than random guesses. The sad truth of the matter is that most of the news is just noise…as in it doesn’t add to your ability to make better decisions or invest more wisely.
The news can influence us in negative ways, especially during difficult times in the markets. Repeatedly hearing negative news of the ilk, “The Dow Jones Industrial average declined another two percent today and has continued its slide for the fifth consecutive day” can eventually wear a person down. We have what behavioral economists call “loss aversion” and one of the findings is that the pains of loss far outweigh the joys from an equal gain. Thus we feel more pain from losing $100 than we feel joy from winning $100. A lot more. Scientists believe we experience losses some two and a half times greater than we experience pleasure from an equal gain.
The more frequently we check our portfolio during these periods the worse it feels. Loss aversion is an emotional response and not something we can do anything about…except recognize that it exists. It takes a lot of “up” days in the market to counteract our experience of the bad days. The stock market has been up for a number of consecutive years now and it’s only a matter of time before the pendulum swings back in the other direction. And constant good news of the market should not lull us into a state of complacency regarding the risk of investing in stocks either.
Conclusion, the news doesn’t help us much. It may help with understanding current market events but not in making solid long-term choices with our money and investments. It is mostly noise. Expert predictions are not adding value to our knowledge or decision capability. Frequent checking of our accounts, which we can do anytime day or night, is not a healthy practice because our emotions can lead us astray, in bad times and good. Taking action on the ‘news’ is not recommended. Having a solid plan and long term strategy for how you’re invested is!