A political crisis in Crimea. A rise in global oil prices. A 100-point drop in the Dow Jones Industrial Average. These are the kinds of headlines that grab the attention of investors. But if you take a long-term approach to investing, such as saving for retirement, there’s no reason to pay attention to this “noise” from the media, your tennis partner or your Aunt Hilda.
Today, online news sites, TV stations and daily newspapers provide 24/7 coverage of major events around the world. That constant stream of images, articles and “expert” comments can affect investors on an emotional level. A negative article can provoke feelings of fear, such as
“I’d better sell my stocks now before the market falls any further.” Or it can induce investors to hop on a trend, such as “I'd better invest in the South Florida condo market because everyone else is buying them.”
Making investment decisions based on the day’s headlines is almost always a mistake. If you find yourself reacting to the news with a feeling of fear, greed or remorse, then it’s time to pay attention to your brain and think carefully about your actions. If the Dow Jones has a dramatic decline, there’s no reason to panic and sell the stocks in your portfolio. When equity prices are perceived as too high, Wall Street may go through a market correction, defined as a loss of 10 percent or more in value. Historically, those drops in the market provide opportunities to buy stocks at “sale prices,” with the expectation that values will rise in the future.
On the other hand, if the Dow Jones, S&P 500 or other stock index reaches a new high, it may be time for investors to consider shifting some funds into other types of assets to preserve their gains in case of a market decline.
If you own bonds, real estate, gold or other types of assets, the same emotional forces may come into play. In fact, many studies show that successful investors do not try to respond to the ups and downs of the markets. They generally follow an asset allocation strategy, making modest adjustments to their portfolios from time to time.
So, if you’re tempted to shift your funds after reading a big headline, pause for a moment, take a deep breath and talk with your financial advisor. Together, you can review your investment goals, the types of risks you face and the reasons you hold a diverse collection of assets in your portfolio. Then you can determine if today’s news will really make a difference to your long-term objectives, and decide what action if any you should take now.
Although most of the political, economic and financial headlines are about transitory situations, from time to time there may be a nugget or two that’s worth a closer look. For instance, a policy change by the Federal Reserve to raise interest rates could have a ripple effect on many types of assets, and perhaps make fixed-rate bonds less attractive to many investors.
A sudden rise in the consumer price index (CPI) might make inflation-resistant assets like commercial real estate or TIPS (Treasury Inflation Protected Securities) more attractive. Or a better than expected economic forecast for China or India might be a signal to think about increasing your portfolio allocation to emerging markets.
In other words, it’s important to be able to “turn off” the daily bombardment of news reports that won’t have an impact on your portfolio or your overall life. If you do hear a story that might make a difference, talk with your advisor before you decide what to do.
Andrew Menachem, CIMA, is a Wealth Advisor at the Menachem Wealth Management Group at Morgan Stanley in Aventura. Views expressed are those of the author, not necessarily Morgan Stanley, and are not a solicitation to buy or sell any security. The strategies and/or investments referenced may not be suitable for all investors. Follow Menachem on Twitter @AMenachemMS