At Halloween, we’re used to spooky ghost stories. The bravest — or craziest, depending on how you feel personally — even seek out scary movies and haunted houses for more fright. But in the financial industry, you find these kind of tales from the crypt throughout the year.
You’ve seen the headlines. You’ve heard the talking heads. They’re all spelling doom. And it’s hard not to think that you should make a move in order to protect your investment returns, right?
Over the past couple of decades, advancements in technology and the introduction of the 24/7 “news” channels have made it possible for even the average investor to have constant availability and accessibility to financial data and information. And, with the advent of mobile devices, investors have access to a constant stream of financial news anywhere and everywhere. As such, it is easy to let the headlines of doom and gloom get your emotions tied up in a knot on a daily basis.
While being informed is a good thing, let’s address, in the spirit of Halloween, why investors need to be wary about how they react to headlines and why there is no need to be scared for their investment returns.
The Media Love a Good Scary Story
You don’t have to watch TV or scroll through a news feed long to see that the media loves a good scary story. Just look at the yield curve.
Since the inversion of said yield curve in the Spring, it’s been one of this year’s hottest topics in financial news. And for good reason: An inverted yield curve is one of the most cited indicators to predict a recession. The mania has grown with each passing month, with the debate centering on whether this inverted yield curve was signaling a recession. Even while citing that the yield curve is just one possible indicator of a slowdown, experts discussed the topic ad nauseam.
But in the past week or so, we’ve seen the yield curve become un-inverted. Has the talk simmered down at all? No, it’s just shifted. Now the debate is whether an un-inverted yield curve means we’re in the clear or that we’re currently in a recession.
The point is that media companies, including those specializing in financial news, are in the business of entertainment. Their target audiences vary and coverage usually focuses on what interests those audiences today.
There are plenty of reasons news often does not translate into actionable trades. As investors, we have unique investment return objectives, and it’s extremely rare to find news that is relevant to individual circumstances and time horizons. Even in those cases, the market would likely have already priced in the news before an average investor could take any action.
History Shows There is No Need to Be Scared
As history has taught us, overreactions to market noise — like being too scared — can be detrimental to investment returns. When you stay on the sideline, you’re more likely to miss the best days of the market, which tend to happen when there is above average volatility.
The chart below from JP Morgan shows that if you missed the most recent best 10 days of the market, your total return would go down by about 3.5 percent.
But the best 10 days aren’t scary. Maybe you’re scared about investing at the worst times.
In that case, let’s say that you invested at the worst times (during market peaks) for the past 19 years. As our chart below shows, investing in the stock market would still have done better (6.58 percent) than leaving your money in cash (.99 percent). Plus, inflation would have eaten away at your purchasing power throughout the whole time period—now that’s scary!
No Scare Tactics Here
In short, we at CLS Investments believe that investors should avoid the media noise around market speculations and stop worrying about scary scenarios and simply stay focused on your long-term investment returns and overall financial goals.
For more insight into how to position your investments in today’s chaotic financial landscape, download the CLS Quarterly Market Outlook.