We All Do It

Investors are bombarded with information.  Some of it is useful, most of it not so much.  In the not so much category is most of the information provided by the financial media.  In fact, this information is typically hazardous to your wealth.  Virtually all of the advisors, investors, and leaders in the financial services industry that I respect, speak of the folly of paying attention to the never-ending nonsense spouted by the financial media in hopes of getting our attention.  Our readership/viewership drives us to their advertisers—which is how the media gets paid.

Given that one is wise to ignore the media, it's not easy.  Recently I discovered just how hard ignoring predictions can be.  On Monday, April 6th, the Dow Jones Industrial Average (DJIA) futures were down about 107 points prior to the market open.  The previous Friday the stock and bond markets were closed for Good Friday.  On Good Friday, the new jobs number was released, and it was below the consensus estimates.  The pundits all weekend were predicting this would cause the markets to go down on Monday.  With this information, the markets were virtually guaranteed to be down for the day wasn’t it?

All of this information that I foolishly paid attention to coincided with some actions that I had to take for a few clients.  They asked me to sell some of their assets because they wanted the money.  I flinched a little bit because we were selling some of their securities on a day when the markets were certain to go down.  Selling “low” instead of selling “high”.

What happened?  I went ahead and placed the sell orders, early in the trading day. I expected that the markets would go down, and the clients might be upset about that fact.  Mutual fund buy or sell orders, placed during the trading day, don't settle until the end of trading day, when the new value is calculated.

The funny thing about markets is that they are unpredictable.  Instead of declining the DJIA rose over 100 points for the day.  All of the equity asset classes (both US and International stocks) were up by similar percentages.  Instead of selling into  declining markets our clients sold into rising markets.  Given the negative information (low jobs number on the previous Friday and the negative futures prior to the market open) who would have predicted that the markets would be up over 0.7% for the day?

In telling this story to a friend of mine a day later he responded with the perfect question, “what did the markets do four months ago?”  I of course didn’t remember, and that’s the point.  The day to day information and movement of markets is unimportant to long term investors.  Reacting to such information is emotional, not rational.  Acting on such information is typically foolish and hazardous to our wealth.  

The lesson?  Day to day, market movements are unpredictable.  Over the long term, ignoring predictions and short-term market movements has paid off for patient, disciplined investors.

Bill HigginsComment