Lewis Wealth Management

Investment Management, Financial Planning, Consulting

Archive for July 2016

The Current Frantic News Cycle and Our Investing Brains

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Our Current News Cycle

The current news cycle is breathtaking. Whether it’s crazy political conventions, Brexit, mass shootings, or a Turkish coup, there is a lot going on right now.

As our news cycles are becoming shorter and shorter and more intense than ever, the noise emanating from the news media increases in volume and intensity. The news media often play on our fears because – let’s face it – fear sells. The news media also create a false sense of urgency by telling us that their information is “breaking.” It’s hard not to feel manipulated.

For investors, the implication is that you should be doing something with your investment portfolio that somehow protects you or takes advantage of the “urgent” news they are currently broadcasting.

How We Get Our News Has Changed Dramatically

Not long ago, there were three television networks and a few major newspapers that covered the national and financial news. Now there are literally thousands of outlets, which include 24-hour cable news channels, blogs, social media, and Twitter. The amount of information available far exceeds our capacity to process it.

As investors, we should choose our news sources as carefully as we choose our investments. These sources should be high quality and objective. There should also be some diversification in your news sources. If you spend all your time watching one news outlet with a single point of view, I believe you are not receiving a well-diversified and objective stream of information. And many news sources now blur the line between objective reporting and pure opinion. As a news consumer, you have to be very discerning.

The Danger of Confirmation Bias

Confirmation bias is running amok these days. Confirmation bias occurs when we have a tendency to interpret new evidence as confirmation of our existing beliefs. The polarization and bias of some current news sources make matters worse. So, if you believe the country is falling apart, you will gravitate toward news sources that will confirm your fears over and over again. This has an adverse impact on our investing brains. There is a difference between being well informed and being fearful. Well-informed investors make good investment decisions; fearful ones rarely do.

It’s hard not to fall into this trap. At the end of a busy day, when I turn on the news, it feels better to watch or listen to something I’m probably going to agree with. It’s much harder to listen to something else that takes the opposite side. It can be annoying and irritating. But if the content quality is good and there is some objectivity, it’s worth listening to both sides.

Long-Term Investors Have an Advantage

Here is some good news for you. If you are a long-term investor, you can ignore almost all the drama and noise that you see and hear on a daily basis. It’s important to remember that you are a wealth builder and using the capital markets to build your wealth over a long period of time.

Wealth is built over time when natural resources, skilled labor, intellectual capital, and financial capital are skillfully combined in an enterprise to generate profits. As investors, we want to capture some of that wealth and make it our own. We do this by providing the financial capital part of the equation. We can provide this capital in exchange for an equity interest (stocks) or as a creditor (bonds).

When we hold stocks, we expect them to appreciate in value and, in some cases, pay us dividend income. When we hold bonds, we expect periodic interest payments and eventually the return of our original capital. The bulk of personal financial wealth in the world has been created through this time-tested process.

How to Filter the News from an Investment Perspective

I use the wealth-building process as a filter to determine whether any news item is relevant to my investment portfolio or my long-term financial goals. I ask the following question: will this news item directly impact the process of wealth building over the long run? That is, will this news item impact a company’s ability to generate profits or repay debt holders? In most cases, the answer is no, and many news items are not of great significance to the long-term investor.

But the truth is that the more anxious we are, the more likely we are to draw some sort of connection between the news item in question and the capital markets. But we should be really thoughtful here. For example, will the attempted coup in Turkey have an impact on most corporate balance sheets in the developed world? Probably not. Are there serious implications for NATO, the war on terror, and international security? Possibly, but those are not necessarily investment issues.

Will Brexit have long-term implications for your investment portfolio? Perhaps, especially if you hold some stock in British and European companies, which most of us do. But we do not have enough information to draw valid inferences or make smart decisions with our investment portfolio at this time. The impact of Brexit will take several years to process and more years to understand. There are too many unknowns at this point.

Short-Term Investors Are at a Disadvantage

Thank goodness we are long-term investors. Short-term investors, like many hedge fund managers, have a much more difficult game to play. Their clients are paying them fees based on short-term performance. Since short-term performance is so important to hedge fund managers, they are out there making speculative bets by trying to trade the current news cycle. And the recent performance of many of these funds is poor.

Speculation is a tough game. You are making bets on the value of something going up or down in value on a short-term basis. There are two sides to each of these bets. Someone is going to win, and somebody else is going to lose. In my view, if you try to trade the news cycle, you are going to be wrong as often as you will be right. You are just adding risk.

For example, after the first two hours of coverage of the Turkish coup unfolded on CNN, hedge fund managers might have shorted the Turkish lira, or they may have taken a long position the next morning when it appeared the coup had fizzled. With respect to Brexit, many hedge fund managers placed financial bets predicting that Britain would stay in the EU. Those bets did not fare so well, but there were a few speculators on the other side who made big money.

Speculating is not long-term investing and it’s more risky. It requires a different set of skills and attitudes. Most speculators have trouble building wealth over time. Disciplined long-term investors almost always prevail in the end. I’m not going to bet someone’s retirement or college fund on a Turkish coup or Brexit.

Conclusion

As a long-term investor, rely on your objective investment process to get you through any news cycle. Evaluate current news objectively. Review your long-term financial goals. Make sure you are saving enough money. Review your asset allocation, and make sure it strikes the appropriate balance between risk and return. Manage that allocation in a disciplined way. Stay diversified. Make sure that the investments you have chosen to fill your asset allocation are delivering the expected return in their respective asset classes over time. If you do this consistently over a long period of time, your chances of success are very good.

The news cycle may cause you to question your investment approach, but making changes to your portfolio based on the current news cycle should be the exception, not the rule.

If you have questions or concerns about your situation, please give us a call at (855) 353-3800.

Thank you,

Austin Lewis

This is an educational newsletter expressing opinions only. This newsletter should not be relied upon until your individual situation is taken into consideration by an experienced adviser. This newsletter is not designed or intended to give you individual investment, tax, or legal advice. We strongly recommend that you consult with your own financial/tax adviser and/or legal counsel for information and advice concerning your particular situation. If you are a client, please give us a call. Past performance does not indicate or guarantee future results. Investing involves risks, including loss of principal.

 

Written by Lewis Wealth Management

July 26, 2016 at 11:25 am

Posted in Uncategorized