When I am out in public many times I am asked about the market and what made the market go up or down that particular day. People love stories. And they need/want to know why something happened. The media is great at giving them what they want. This is their job. Answer a question for a particular event going on right now.
Let’s say a journalist calls up a prominent advisor or trader or financial executive on a day the market is down 2%. The answer might be ‘the market is down due to unrest in Ukraine’. Sounds reasonable right? But is this the real reason for the down market? Perhaps it was due to any number of different ‘reasons’. Often far too complex for a journalist to write about.
I believe that most trading days that you can go to the Wall Street Journal and find five reasons why the markets/sectors/individual stocks should go up and five reasons it should go down. Every day.
Like I mentioned in the beginning people are looking for a story to validate a decision to buy or to sell. And every day they can find a reason to do both.
Let’s say you are watching CNBC or reading about some expert and you learn that the Fed will make a change in monetary policy and the market goes down 2.2%. You will then conclude that any time the Fed makes a change to monetary policy that you should sell your stocks. Only the next time when the Fed changes monetary policy the market goes up 3%. Ooop!
Remember the markets are extremely complex. There are thousands of variables affecting investments around the world. Any time an advisor/broker tells you a story about why a particular asset class/sector/individual stock will be a good investment going forward, be wary. Their story is a sales pitch. Because no one can predict the future.
The markets are, although not perfectly efficient, far too efficient to take advantage by anyone on a consistent basis.
Successful investing needs to be long term focused. Any short term noise is meaningless. Any predictions about market/individual stock direction are meaningless.
If your advisor/broker truly has a long term focus, they will show you your investment policy statement (IPS). The IPS is your guide, it tells you the plan going forward. It tells you what to do when the market is down and when the market is up. Consistency leads to success.
The need for stories leads many investors to believe that if they study the markets and watch CNBC and scour the internet for answers they can beat the market. This requires a lot of agonizing work and a great amount of time. Many believe that there is a broker/advisor who will do this for them or they do it themselves. In nearly all cases this assumption leads to disappointing results.
A much more efficient approach is to build a globally diversified portfolio around the dimensions of higher expected returns and applying them consistently. These dimensions are derived from data over long periods of time and across different countries and multiple markets.
To succeed in investing for the long term you need to maintain a long term focus. Avoid the short term noise and STORIES.
Fire your broker/agent and hire an investor coach/fiduciary adviser.
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