November 16, 2021

Financial News – Friend or Folly?

We've never had so much access to so much news. Your mobile phone & social media provide a constant stream, but how helpful is all that news really?

We’ve never had so much access to so much news. Your mobile phone provides a constant stream of what’s going on in the world, often within minutes of it happening. Social media has increased the spread of news flow even more. Is this all helpful though? And importantly for your investment portfolio, does more access to financial news lead to better investment outcomes?

How News Affects Markets

News plays a significant role in the short-term ups and downs of the investment world. A drop in earnings, change in CEO, political uncertainty, natural calamities, and other major global events could cause investments to drop due to panic selling. On the other hand positive news could push them up. So surely it makes sense to keep up-to-date with current affairs and react to them as they happen? We don’t think so.

While short-term movements can be heavily influenced by the news, over the longer term it doesn’t have nearly as much of an impact. That’s because sentiment can wane or reverse, investors start to forget things that have happened, or new events can cancel out previous ones. While there’s no denying news reports can cause investment valuations and markets to move around for a while, the longer your time horizon, the more even global-scale events can become little more than a wrinkle.

Past performance is not a guide to future returns. Source: FE Analytics to 31 October 2021.

Set To Shock

Most people know news headlines tend to be led by negatives stories. A look at any of the major news networks will show you that. Stories that shock are generally more likely to generate interest than ones with a positive message. That’s because worries or losses tends to generate a much stronger emotional response than optimism and gains, and is why we get front page headlines such as;

“collapse sends shockwaves round the world”

“markets in biggest fall since…”

“economy plunges into recession”

This focus on negative news isn’t particularly helpful though. It appeals to our psychological make-up to be generally more concerned about what could go wrong than right, but could make things appear worse than they really are. Perhaps more significantly, it might also encourage knee-jerk decision-making, which could be damaging to your investments.

Late To The Party

The other problem with reacting to news is you’re probably already too late. Not only are professional traders using computer algorithms to react within nano seconds, but markets are not a reflection of the present – they represent investors’ combined expectations about the future. So if you invest based on something going on right now, the chances are you’re already several steps behind.

Another mistake many investors make is to look at what’s being reported on the economy and assume markets will follow suit. Markets often don’t get the message though. Both 2009 and 2020 were the worst years for the global economy since the 1930s Great Depression. Yet in 2009 the global stock market gained 30% while in 2020 it rose 16%.

In other words, had you sold your investments or held off investing based on gloomy economic news, that may have been the worst thing you could have done.

The Bottom Line

Ultimately the financial news is not there to help you – it’s out to entertain and sell advertising. It doesn’t report things it thinks will necessarily be useful, but things to grab your attention and keep you engaged. While it’s of course not all bad, and can certainly be useful at times, we don’t think investors should base long-term investment decisions on short-term, sometimes sensationalist, stories.

In the era of technology, social media and news will no doubt keep having a temporary impact on markets and investments. What’s important though is to stay focused and accept prices and valuations will move, sometimes irrationally and unpredictably, on headlines.

That’s not so say we don’t keep our eye on markets or the economy – of course we do – but it’s always with a view to what could happen over the next ten years, not what’s happened in the last ten minutes. As has been shown time after time, we believe tuning out of the noise is one of the best things you can do for your long-term investment returns.

Written By
Nikita Maxwell
Investment Analyst

Past performance is not a guide to future returns. Investment in securities involves the risk of loss and the advice herein cannot be construed as a guarantee that future performance will be reflective of past returns.

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