A safe way to lose money
Every January, the financial media comes out with their useless stock market predictions for the year. During the year we then get bombarded with their equally useless daily explanations, describing why the stock market moves up or down. Every day there are usually some positive and some negative financial or economic news that can be interpreted to explain the markets movement. Explanations of daily changes in aggregate stock market indices are among the most ridiculous inferences made by the financial media. They keep coming up with these because they get away with it. In fact, these explanations have become so common that they are simply accepted as facts.
The financial media generally doesn’t hold themselves and or their guest experts accountable. They don’t have to, because no one knows what causes stock prices to rise or fall on a given day and these experts can come up with any reason they want.
Markets don’t rise or fall as the direct result of economical or geopolitical events. Investor’s reactions to these events is what causes the fluctuations. Much of the markets ups and downs are actually caused by the media. Contrary to what investors would like to believe, it’s not the financial medias job to help investors achieve their financial goals or protect their assets. Their one and only job is to keep you watching. My intention has been to educate people about investing, how markets work and how to create a portfolio to meet their financial goals. If you want to achieve these goals, the first thing you should do is ignore 99% of what you hear in the media.
The simple truth is that financial media does not know why the stock market did what it did today, and it doesn’t know what the stock market will do tomorrow. It’s misleading to claim otherwise.
One or two wrong moves can be disastrous for your portfolio. In the last 20 years, the best 10 days in the markets, accounted for 75% of all returns. Let that sink in and combine that with the fact that no one can predict these 10 days. You should always be invested, because missing those days means that your returns will be much lower. Buy and hold investors can rebalance their portfolios during stock market downturns. By rebalancing, a well-diversified investor that isn’t market timing can sell some government bonds, which tend to rise during crises like the 2008 economic recession and March 2020 and buy undervalued opportunities in the stock market. Rebalancing is part of my regular portfolio maintenance for clients. Bonds have underperformed in the fist 6 months of this year, but they generally heal itself and that reversal has already started. If we go through a recession, which is possible, these opportunities will arise.
If people can’t beat the market listening to pundits, then why do many keep paying attention to them, when following their advice is likely to offer zero value in the long-term? Well, people love to be entertained and hear stories. It is human nature after all, to assume that things can’t happen randomly. It’s ok to listen to retired football players over-analyzing on TV and find correlations that don’t exist. But it’s dangerous to trust your financial well being to people that clearly have a different agenda.
The last point is key. Most people have forgotten about all the wrong predictions that columnists writing in Forbes and other magazines, financial news channels, mainstream media outlets, alternative media outlets and YouTube channels, have made over the years.
Knowledge and good advice are important but emotional control is key in investing. Human emotions like fear are strong. It is estimated that fear is at least twice as powerful as greed.
The best way to increase your emotional control is to switch off most sections of the media referring to financial markets, and seldom check the balance on your investments. Understand the difference between a trader and an investor. And remember that past predictions are no induction of future correct predictions. So be very skeptical next time a guest is introduced with the line that “he predicted 2008” or any other event. Media can be powerful and helpful but stay away from fortune tellers.
