Blood bath. Frenzy. Sell off. Spooked investors. Wild session. Stocks plunge. Crazy market swings. These are just a few of the sensational phrases the financial media use to describe stock market activity. These phrases are designed to evoke emotions like excitement, anxiety, and even downright panic, and the intention in using phrases like this is to compel the audience to take an action. Whatever action you are urged to take (click on a headline, share a story on social media, impulsively buy or sell stocks without doing due diligence) is tapping into your lizard brain, triggered by hormones that have convinced you that the world has suddenly become dangerous and you need to act right away.
As a certified financial planning practitioner for over 20 years, I would argue that when the media reports daily or hourly stock market returns, all they do is to perpetuate the idea that market timing (moving in and out of a financial market or switching between asset classes based on a prediction) works for everyone, which creates unnecessary agitation and unease for otherwise rational investors. The stock market’s hourly/daily activity is NOT newsworthy and is irrelevant in the long-term. These market reports tell an incomplete story, yet we are tempted by them regularly.
Understanding the News You Consume
When you catch the market index returns for the day, what do they report on? Usually, these reports focus almost exclusively on the Dow Jones and the S&P 500. While the overall numbers tell a story of how the markets are reacting to the day’s news, the near-constant reporting of these numbers tells a very skewed story. Let’s not forget that the Dow Jones is only 30 stocks, and the S&P 500 is 500 stocks. These are hardly accurate representations of the entirety of the U.S. stock market, which includes thousands of other stocks representing other areas of the market, all of which are included in a fully diversified investment portfolio.
And how about international indices, both large and small, which also represent thousands more stocks? There are so many indices to track: from Emerging Markets and Real Estate Investment Trusts (REITs), Value and Small, to Growth and Large. Obviously, the media can’t report on all these other indices from around the globe in a quick five-second sound bite on the nightly news. But their continued focus on such a small area of the stock market does nothing to inform or educate the general public.
On average, there is a 50/50 chance of the market being up or down each day, but over longer periods, market indices are positive. We would all be better off if the daily stock market returns were not reported at all. Weekly reports suffice and keep everyone’s blood pressure down. (Financial professionals commonly recommend reviewing your portfolio at most once a month, but likely quarterly is best). The less often you look, the less volatile you’ll perceive your portfolio to be, and the easier it will be to achieve those long-term positive market returns.
Turtle (vs. Hare) Power
Slow and steady wins this race. Cable TV’s business new channels, with their constant ticker tape of stock market index tracking and guest commentators making baseless market predictions or selling their mutual fund leaves investors confused on how to really invest. “Beat the market,” speculative stock picking efforts, and market timing strategies consistently cause a negative contribution to portfolio returns. For the most part, these hyperactive market-tracking activities waste time, cost money, and don’t reward your efforts. This is a complete distraction to sound investing principles such as low costs, diversification, asset allocation, portfolio rebalancing, and tax management.
This is not just our firm’s opinion; it has been proven time and again by numerous academic studies. The most important point of disciplined long-term investing and portfolio rebalancing is to have a plan in place in preparation for market volatility. Always expect extreme volatility from time to time and take advantage of portfolio rebalancing opportunities when they are identified. Although volatility isn’t necessarily comfortable for investors to experience, it can reward you handsomely if handled properly.
So, the next time you’re having your morning coffee and hear your trusted news outlet reporting on the Dow Jones Futures (not just the actual down to the second index performance, but a prediction of what it might be before the stock markets even open) quickly turn down the volume and avoid this meaningless “news.” Then, later in the day when you hear or read how the stock market did for the day, take it in, move on, and read something other than the financial news instead.