I LOVE the questions that kids ask. This week, my first grader told me he had heard the word “caricature” and wanted to know what it meant. I explained it and then we went online to see some examples. In our highly politicized culture, we didn’t have to look far to see some exaggerated cartoon depictions of various political leaders.
It occurred to me, though, that our posture toward investments isn’t all that different. Oftentimes, financial commentators take a similarly one-dimensional, overly simplified view of things. The past several weeks have been a case in point. First, in response to a government economic report, stocks dropped 10% through Feb. 8. Then, in response to no news in particular, the market began to rebound and has since regained roughly half of what it had previously lost.
What will happen next? Turn on the TV and you will hear opinions of every stripe. On one side, an esteemed, Nobel Prize-winning economist will tell you that the market is at 1920s-like highs. Others, however, will tell you that the new policies in Washington could drive the market higher for years. If you find all this a little disconcerting, keep these three notions in mind:
1. What financial commentators say is incomplete. Putting aside the impossibility of being able to predict the future, no person ever has all of the current data. As a result, every opinion you hear from pundits is necessarily an overly simplified story, based on the information they have or are choosing to cite. The fact is, if you’re in the business of giving your opinion, you are more likely to burnish your reputation if you cherry-pick one piece of data and make a strong statement based on it, rather going on TV and honestly admitting, “Gee, I really don’t know.”
2. Many commentators want you to react. Take, for example, those polished brokerage firm analysts who frequently appear on TV. What is their role? They speak and publish regularly in an effort to get you thinking about your investments, with the hope that you will decide to make a trade—ideally through their firm.
3. What you hear won’t necessarily help. A classic 1987 study proved the detrimental effects of the media on individuals’ financial decisions. Psychologist Paul Andreassen created a simulated stock market environment and examined people’s trading behavior under two different conditions. One group was provided with daily price quotes for a group of stocks. The other group was provided with the same price quotes, but was also provided with news headlines about those companies. Result? The test subjects who received the news headlines traded more and made less.
Adam M. Grossman’s previous blogs include Five Ways to Diversify, Headlines and Head Games, and Five Steps to a Better 401(k). Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.