By Chris L. Meachem, CPA, Cornerstone Wealth Management
All too often, we see investors who are underperforming because they let fear and greed drive their decisions. Because of this psychological entrapment, they are buying when prices are too high and selling when prices are too low. One of the main reasons for this phenomenon is that they are focusing too much on the noise of financial news. In our current technological age, where everyone has a voice, and every fact and opinion is just a click away, can it be that we have too much access to information?
Behavior analyst, Daniel Crosby, Ph.D., wrote an article on the over-consumption of financial media, warning investors about when and what and how much to listen to when it comes to your investment information.
Crosby recommends to simply, “turn your TV off.” This would probably include your smartphone and tablet as well. But he realizes most people have a hard time being that disciplined. The allure to indulge in the bevy of websites, apps, channels, and pundits proves too great. The problem, however, is that unlike in most other arenas where more information leads to greater knowledge which leads to better results, the opposite is often true in the financial world.
Crosby points out that one of the byproducts of this influx of technology and information is a change in holding time. Fifty years ago, the average equity holding period was six years. And today? The average is six months. Obviously, the trading technology has made enormous advancements, but does that necessarily mean it has helped us become better investors?
When we are constantly moving things around, buying and selling, following the latest trends and tips, we often lose sight of long term goals and smart investment practices. In the article, Crosby points out that Warren Buffett’s famous advice is to pretend you have a punch card with only 20 punches, and that is all you have over an investing lifetime. This philosophy promotes the idea that many times the best move is the one you don’t make.
So how do you reconcile the fact that financial advisors are constantly preaching the importance of being an informed investor with Crosby’s article that tells you to turn off the TV? There are several key things to keep in mind when indulging in financial media. The first, according to Crosby, is to evaluate the source. Does the “expert” have the right credentials or are they on TV because of their big personality? Is there advice grounded in research or in creating sensational headlines? The financial industry is not the only field that utilizes sensational headlines to grab readers’ attention. As Southern Californians, how often do we see the news channels shout “Storm Watch!” in big scary letters, only to see a light drizzle? Realize that they do the same thing with your financial news.
It is important to realize that the bottom line for any news show is to sell advertising. The bottom line for any website is to get clicks. Unfortunately for investors, these are the things that drive motivation for most media, not your financial success. After all, you can imagine they’d have a hard time attracting an audience and selling advertising if they came on and told investors simply to “do nothing.”
Ultimately, Crosby says that the “best strategy is to become skeptical without being jaded and cautious without being paralyzed by fear.”
Work with your financial advisor to help block out the noise and to ensure that you’re being disciplined and making smart investment decisions and not reacting from a place of fear and greed, chasing the newest trendy tip.