Financial news can be dangerous to the health of your investment portfolio.
I spent some time yesterday reading recent articles about the stock market. What I found was mostly hysterical hype (“Gasp! Dow Jones Industrials tumble 400 points!”). All the financial stories seemed to be written as if our investment horizons were days, not years. No wonder people panic when the stock market hits a rocky patch. But do daily market movements — even 400 point drops — really matter? How important is up-to-date financial news to the average investor?
Turn it on, but tune it out
The May 2008 issue of the AAII Journal includes an article entitled “The Stock Market and the Media: Turn It On, But Tune It Out” in which author Dick Davis argues that daily market movement is often illogical. Except for obvious catalysts — military coups, natural disasters — nobody knows what makes the market move on any given day. Short-term changes appear random. Besides, they aren't really relevant if you have a long-term investment horizon (which is probably the case for most GRS readers).
To the long-term investor, daily market movements are mostly noise and filler. “What's important is repetition or the lack of it,” Davis writes. A trendline is more useful than a datapoint.
I believe one of the worst things that can happen to a long-term investor is to be instantly and totally informed about his stock. In most cases, spot news fades into irrelevance over time…Big market moves may be inexplicable, but a long-term or dollar-cost averaging approach precludes the need for explanations.
You can watch the daily investment news, but don't let it sway your decisions. “Focus on the long term,” Davis writes, “and you can ignore the media's distortions.”
No news is good news
Davis isn't the only one to believe that no news is good news. Research backs him up. In Why Smart People Make Big Money Mistakes (and How to Correct Them), the authors cite a Harvard study of investment habits. The results?
Investors who received no news performed better than those who received a constant stream of information, good or bad. In fact, among investors who were trading [a volatile stock], those who remained in the dark earned more than twice as much money as those whose trades were influenced by the media.
Though it may seem reckless to ignore financial news, the book argues that it's not. “Long-term investors need not concern themselves with yesterday's closing price or tomorrow's quarterly earnings reports.” Make your decisions based on your personal financial goals and a pre-determined investment strategy, not on whether the market jumped or dropped yesterday.
For more on this subject, check out:
- Smart Money: Traders profit best by ignoring most financial news
- Free Money Finance: Ignore daily financial noise
The daily fluctuations of the stock market are especially meaningless to me. I'm still learning the basics of saving and investing. I get more from reading the words of Warren Buffett or devouring books like The Four Pillars of Investing than I do from watching talking heads speculate on why Apple's stock price fell.