From economic downturns in China to market meltdowns in Greece, it seems like someone's shouting that the sky is falling every time you turn on the news. Given the financial media's tendency toward exaggeration and hyperbole — after all, steady markets don't exactly make for attention-grabbing headlines — it's no surprise that many investors tend to react emotionally to every market up and down.
Unfortunately, the media's insatiable need to garner ratings isn't exactly good for your peace of mind... or for your portfolio. It's hard to know whether or not you really need to be hanging on Janet Yellen's every pronouncement or every self-proclaimed financial "guru's" reaction.
So what's a rational investor to do? How should you decide how much financial news to follow, and how much to ignore? Our wealth advisors share their knowledge.
Investment Guidance: Take the Long Term View
Though we understand why it's so easy to react emotionally to breaking financial news by jumping in and out of the market or attempting to pick the next winning stock as recommended by the latest financial celebrity, taking the long-term view is a more rational approach. If you analyze market data over time, it's clear that a consistent, stay-the-course approach has been historically more successful than attempts to time the market.
Multiple empirical studies show that taking a passive approach to investment that does not include active investing or knee-jerk, emotion-driven responses to market volatility offers greater returns. As we've written about extensively at Premier, the key lies in creating a truly diversified portfolio with properly allocated assets across a range of classes, then maintaining that diversification through regular rebalancing.
Sounds pretty simple, when you put it that way. Unfortunately, human nature doesn't always lend itself to the most rational approach. It's all too easy to hear a gloom-and-doom report in the financial media, panic, and react emotionally... even if you know better. In an age where we're all continually through smart-phone technology, keeping calm and not reacting can seem even more difficult.
Wealth Advisors Emphasize Staying the Course
One way to avoid the temptation to react emotionally to market turbulence is by taking steps to avoid this type of behavior before the fact. The method known as the Ulysses contract can help. Think back to Humanities 101 and the story of Ulysses; when his ship was about to sail past the island of the Sirens, whose song lured many a sailor to their death in Greek myth. Ulysses, however, planned ahead by ordering his crew to plug their ears and tie him securely to the mast, so as to avoid the Sirens' song.
Investors can take a page from Ulysses' playbook and create a contract of their own. The concept is simple: You know you'll be tempted, so you take steps ahead of time to prevent acting on that temptation. For instance, you may want to create a checklist to go over with a trusted wealth advisor if markets fluctuate, so you can review your portfolio from a neutral standpoint, rather than an emotional one. Think of this process as setting up speed bumps that will help you continue to make good financial choices.
And though the thought of being less informed may seem counter-productive, it may benefit your peace of mind to turn off the constant flow of information from the financial media every now and then. By nipping the potential source of emotional reaction in the bud, you'll reduce your chances of making decisions that may harm your long-term investment goals.