The Informed Investor

It’s easy to think that checking in daily with Bloomberg or CNBC equates to achieving better returns with your investments. After all, they bring on top experts: PhDs, hedge fund managers, and economists, all waiting with updates and their thoughts on what is going to happen next in the market. That’s all critical to managing your investments and will help you get better returns…right?

With over 38 years in the business helping many successful people better manage their money, I can confidently tell you watching a lot of financial news can do just the opposite.

Much of the financial news is made up of market forecasts. They bring on professionals, all wearing smart-looking suits, and ask them where they see the market going…

“We’ve long felt that the only value of stock forecasters is to make fortune-tellers look good.”
-Warren Buffett
You can see Warren Buffett’s opinion of these pundits/experts. But they are better-informed than you (since they stare at financial screens all day for a living), so can their forecasts really be that unreliable?

Put it to The Test
Fortunately, we can answer that, since someone actually combed through extensive data to see just how accurate those market forecasters really are.
Salil Mehta, statistician and a chartered financial analyst who previously worked on Wall Street and now teaches as an adjunct professor at Georgetown University, analyzed the accuracy of 186 annual stock market forecasts for 1998 through 2015 from firms such as Barclays, BlackRock, Morgan Stanley and Prudential.

His findings? The Wall Street pro forecasts were no more accurate than a coin toss.

Here’s the thing: we all have opinions, but nobody, not even Warren Buffett, can predict the future. Strangely, on financial news, they seem to ignore that fact and keep trying. But if these predictions are not accurate, are they at least good for entertainment value?

The Undesirable Side of Financial News
According to Michael Pascoe, “With ‘live’ reporting and 24-hour business channels, the constant gyrations of the market have to be made to seem more dramatic to get attention. Every other movement is a ‘plunge’; a down day is ‘breakdown’ or ‘crash’….and on and on.
This dramatization is understandable when you stop and think about the business model of these financial news channels:
Who pays the bills? Advertisers.
What do advertisers want? To increase viewers.
What attracts viewers? Dramatic headlines!
What makes a headline dramatic? Major disasters and incredible opportunities!

The financial forecasters are marketed as keeping you informed when in reality they might just keep you stressed. And worse, they inadvertently promote investing mistakes based on emotions—either through fear of deep losses or fear of missing out on further gains.

The Danger of Emotional Investing Decisions
The risk here is that the news channels can make you react to the news when in reality, reacting is your worst enemy. That’s when people tend to buy high (“have to get in on this must-have stock or sector”) or sell low (“get me out at any price”).

Unfortunately, that really happens. Studies of investor behavior show that even index fund investors don’t match index results because they tend to buy high and sell low instead of just staying invested. Staying the course through the highs and lows, good news and bad has proven to be the smartest choice.

In 2018, the S&P Index lost 4.38%. So index fund investors should have lost 4.38% too, right? Not exactly. According to Dalbar, Inc ., a research firm that studies investor behavior, the average investor lost more than twice that: 9.42%.

How does this happen? It’s usually a purely emotional reaction. When the market drops precipitously, people sell, fearing the worst. Then they may only reinvest that money after the market has gone up quite a bit again and “seems safe.”

What can you do to improve your returns?
This may be obvious by now, avoid reacting to the financial news. As we’ve seen, it will naturally make many investors tempted to react.
The keys to successful long-term investing are discipline and consistency.

Discipline is imperative to fight the urges to sell when everyone else is selling and buy when everyone else is buying. Instead of reacting to these urges, you need to realize that the market will fluctuate, and have the will power to stay the course.
Of course, this advice is simple in theory, but not at all easy in practice.
That’s where an impartial independent financial advisor can help you. They can be the protection between you and an expensive emotional mistake. The best independent advisors are not only trained in the financial and behavioral aspects of investing, but they also don’t have the emotional
attachment you do to your money and can help you make good financial decisions. They may use your Investment Policy Statements (a “roadmap to your financial goals) and financial plan to help you feel more confident and to ease your stress during times of market volatility.

Always work with a fiduciary advisor, as they are legally required to do what’s best for you. That would seem to be a given that you would receive unbiased, quality advice from an “advisor”, but believe it or not, that doesn’t always happen.

Along with finding a fiduciary, look for a fee-only advisor. A fee-only advisor gets paid only with fees that come from you, the client. They are not salespeople, and no company is paying them to push a particular financial product. This helps minimize other conflicts of interest and ensure that they are doing what’s best for you.

Finally, you may increase your returns by lowering your investment expenses. So make sure your financial advisor consistently utilizes low-cost investments to keep more of your money working for you.

When it comes to your investments, of course you want to stay informed and make wise decisions. But the wisest decision could be to switch off the financial news and remember that it’s perfectly natural for the market to have down days as well as up days.
A high quality fiduciary financial advisor who knows you and your situation may make that a lot easier.

A financial industry expert on TV, radio or in the paper? Maybe. Maybe not.

Randy Garcia, CIMA®, AIFA®, is CEO and Chief Investment Officer of the Investment Counsel Company Nevada. ICC is a fee-only, fiduciary financial advisory firm. Randy’s mission is to help investors understand the inner workings of the financial industry to help them make informed decisions.

If you have $1,000,000 or more in investable assets, call Randy at 702-871-8510 to make an appointment to discuss how ICC may be able to help you work toward your financial goals.