Reacting to headlines is perilous!mspooner
You might notice that the average ‘Joe’ was far more concerned about his job (justifiably) until we began seeing headlines such as ‘Dow Hits Highest Close Ever.’ All of a sudden the stock market is once again a worthy topic for discussion and it’s okay to actually speak to one’s investment advisor. Judging by money flows it’s a good bet that clients are instructing their advisors to buy stocks, EFT’s, equity mutual funds or whatever it takes to get them invested and fast. There’s nothing but good news. As I type this, ‘Stocks resume winning ways’ appears on the TV screen (CNBC).
Before succumbing to the urge to herd let me take you back to June of 2010.
In the first chapter of A Maverick Investor’s Guidebook (Insomniac Press, 2011) I wrote the following:
In one newspaper, under the title “Economic crisis,” I found the headline: “World recovery under threat as growth slows, stimulus wanes.” On the same day in another newspaper, under the title “Recovery angst” was the similarly ominous caption: “Economic trouble is all investors see.”
If you are spooked by such nonsense and inclined to adopt a ‘wait-and-see’ approach before investing any of your money at all in financial markets, then give your head a shake. These headlines are gold!
I went on to pose the question: “If the press is even partially representative of what economists and strategists are recommending, and if investors all share the same sentiments, then what happens when there’s some good news?”
There was plenty of good news even in 2010, but it was generally delegated to those pages in the back of the newspapers which people seldom read. One example, and a very important one for stocks, was rapidly improving corporate profitability.
While the general mood was (and continued to be) let’s say ‘despondent,’ institutional and retail investors kept taking money out of stocks and channeling it into money market funds and bonds – to take advantage of what tiny returns were available in those securities (yes, I am being sarcastic).
Meanwhile in answer to my rhetorical – because it should have been obvious what the answer would be – question in 2010 we certainly know now what happened when there was good news. Stocks skyrocketed and recently surpassed their previous highs.
My concern today is that investors will make the same mistake they always seem to make. Rather than ‘interpreting’ headlines, they will simply take them at face value and chase the stock market at an inopportune time.
I am paraphrasing, but I’ve heard and read nothing but good news of late such as:
- “It’s definitely a ‘risk on’ market.”
- “Don’t fight the FED!”
- “Looks like we might avoid the usual summer slowdown this year.”
Most worrisome: Kramer (wait long enough and you’ll eventually be right) is more wound up than a four-year old high on chocolate. I do believe that stocks are a better investment than bonds over the next several years, but the trend in corporate profitability (and consumer sentiment, GDP and job growth) will be interrupted – count on it – affording convenient opportunities to get invested. With nothing but good news and euphoria, what happens if we get some bad news? A chance to invest at lower price levels. Right now, ‘risk-on’ is exactly what you should expect if you respond to headlines.
Click on this link for a chuckle: George Costanza Does the Opposite
Posted: March 20th, 2013 under Asset Allocation, Debt, Exchange-Traded Funds, Finance, Financial Planning, General, Guaranteed Investment Certificates, Investments, MONEY®, Mutual Funds, Personal Finance, Saving, Tax-Free Savings Account.
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