When Investing, Ignore the Headlines
Reacting to the markets is bad for your wealth.
As I’m writing this, news and uncertainty about the COVID-19 Omicron variant has sent markets on a wild ride. For the past week, the S&P 500 index has closed up or down in the range of 1% to 2%. Many headlines, in the wake of historic stock performance these past few years, declare a correction is just around the corner. Some even predict a stock market crash.
If you follow market news, you’re bound to be inundated with negative headlines. Here are some I’ve seen in the last couple of weeks:
Harry Dent: Stock Market Crash Coming in Early 2022; ‘Economy Is Dead’ (ThinkAdvisor)
Dow tumbles 900 points for worst day of year on fears of new Covid variant, S&P 500 drops 2% (CNBC)
‘Way overdue for a correction’: Long-time bull Jim Paulsen delivers a 10% to 15% pullback forecast (CNBC)
Omicron Fears Slam Stocks Again. Why a Correction Could Be Near. (Barron’s)
Markets End Downbeat Week as Tech Stocks Fall, Omicron Weighs On Markets (Wall Street Journal)
Especially if you’re new to investing, or you’re thinking about getting in, the news and uncertainty might cause you to panic or scare you away. But it shouldn’t. While it may be tempting to make investing decisions based on what you read in the news, doing so will make you worse off.
To understand why news shouldn’t scare you away from the market, it helps to put things in context. Consider that between 1926 and 2018, the U.S. stock market performed between 10% and 11% on average annually, despite the Great Depression, World War II, the threat of nuclear annihilation, civil unrest, stagflation, an oil crisis, the dot-com bubble, the global financial crisis, and more.
At the time of many of these events, the stock market certainly looked unappealing. But if you had held out and made no changes to your investment strategy, you would have done much better after each crisis passed.
Just look at what happened to the stock market at the start of the pandemic in March 2020 and compare it to how quickly things have turned around since then. From the mid-February high to the bottom on March 23, the S&P 500 dropped 34%. By mid-August the index had fully recovered its losses. As of market close Friday, the S&P 500 is up more than 90% since the bottom.
Making investing decisions based on headlines might seem like you’re favoring facts above all else, but you’re really favoring emotion. You’re letting fear and uncertainty dictate your actions, which can lead you to make harmful decisions, like selling stocks as they fall, moving to bonds, or missing the opportunity to invest when stocks are on sale.
As much as I love financial media, getting too absorbed in it is bad for your wealth. Financial news stories are often a mix of real events and financial celebrities making predictions with the accuracy of a broken clock. Even when the news is true, it’s not actually relevant to what decisions you should be making. Financial media have too many incentives to create negative stories. Because what you should be doing — investing in boring index funds on a periodic basis for the long term — doesn’t really fit with the media model of producing constant news and telling you how you should react to the latest event.
You shouldn’t react. An investor that simply invests a portion of their paycheck consistently in broad-market index funds and sticks to a plan can build wealth to fund their retirement in just a few decades irrespective of the events of the moment.
If investing still makes you nervous, here are two ways you can go into it with greater confidence and conviction:
Pick an Asset Allocation You Can Stick With
Whatever you decide to invest in, you should be prepared to stick with it for the long-term. If you find yourself making major changes because of what’s going on around you, that might be a sign that you didn’t have the right asset allocation in the first place. If investing in 100% stocks causes you to panic and sell during a downturn, perhaps you should have some bonds in your portfolio. You should always be aware of the worst case scenario when investing.
Only Invest for the Long Term
If you’re investing in stocks, you should invest for a long-term goal. If losing money in stocks over a short-term period, say around five years or less, upsets your financial goals, you shouldn’t invest in stocks for that goal. You should instead use more liquid, safe assets like cash or short-term bonds. Stocks are the best instrument for a longer term goal, think 10 years and beyond.
Yes, bad things will happen as you invest. You will probably face a major stock market crash in your lifetime, and the recovery may not be as quick as 2020. You will face many smaller crashes as well. There will be times when you begin to question whether you can really stomach the ups and downs and negativity around you.
But not only do these periodic stock market corrections, dips and crashes not have any meaningful impact on the long term, knowing how to use them to your advantage can improve your outcomes. In fact, if you’re a young investor, you should welcome every opportunity to buy into the market at a lower price. This doesn’t mean you should hold off investing for a dip that may or may not come, but when the stock market does go on sale, you should absolutely invest more money if you have it.
Your long-term plan matters more than fleeting news events. Don’t let events in the world shake your confidence. There will always be people claiming to know what will happen in the economy or the stock market, but they can’t predict the future. The news you read about today will show up as nothing more than a blip in 10, 20, 30 years from now. No virus or variant will have impacted your long-term performance, unless you chose to react.
Just ignore the headlines and invest with your goal in mind.