In a recent interview with a potential client, I noticed that all of her investible assets were in cash.
When I asked for the reason behind this lamentable state of affairs, she replied that another adviser recommended that she sell her stock funds because “the market is getting pricey,” or words to that effect. There’s only one reason that she followed his advice — he scared her.
This reminded me of a 2013 article in The Wall Street Journal, “What Are You Afraid Of?” The article provided recommendations to follow if any of the following scary scenarios comes to pass:
- Stocks suddenly start sliding
- A natural disaster or war sparks market panic
- Interest rates jump
- Interest rates remain low
- Deflation threatens
- Inflation surges
- Europe’s fiscal crisis erupts again
Pick your biggest worry from the list. If you follow the suggested actions, you’ll be left with a narrowly focused, undiversified portfolio. Recommendations for one scenario might be the worst course of action if another scenario occurs instead. If your chosen anxiety comes to pass but your timing is off, the recommended actions might do more harm than good. And let’s be honest, no one knows if any of these seven events will occur or what their consequences might be.
You’ll find similar, investor demoralizing articles everywhere in the financial media — most of which describe low probability, unlikely events. Often, they frighten investors into making hasty, emotional decisions that cause more long-term financial damage than the scary events themselves. The most damaging consequence of the financial crisis wasn’t the temporary 50 percent decline in stock prices. It was the unrecoverable loss experienced by those investors who sold in panic and have remained in cash for the past six years.
The world is complicated, the future is uncertain and periods of turmoil are commonplace. There’s nothing you can do about it, so get used to it. When there is nothing but fear in the air and investor confidence is low, a well constructed portfolio, a prudent investment strategy and a long-term focus can help you stay the course and continue funding your retirement accounts. At such times, disciplined investors have the opportunity to take advantage of temporarily low asset prices.
If you want to be a successful investor, let go of events you can’t control and devote your time and energy to things you can control. You cannot control your portfolio’s performance but you can control the risk you are willing to take through proper asset allocation. How much you save and invest each year will have a greater impact on your retirement lifestyle than anything reported in today’s news.
Here some reasons why overconsuming the financial media might do you more harm than good:
- You'll never gain an optimistic view of the future from the financial media.
- Poring over the financial news doesn't give you an advantage in the market. Today's news has already been factored into prices by people much higher up the information chain than little old you.
- The financial media exaggerates the sensational to grab and hold our attention.
- Today's headlines are unreliable indicators as to where the market is headed and are irrelevant to anyone investing for a retirement several decades in the future.
- It's easy to mistake information for insight. Information is everywhere; insight is in short supply.
If you suffer from “financial media overconsumption anxiety,” here is my suggested remedy:
- Try to put today's events into perspective. Perspective comes from studying history, not by watching the news.
- Follow the financial news only on Wednesday and Friday. You won't miss anything important and you'll free up three days each week to devote to the more important things in your life. You'll worry less, have less stress and more time to think creatively — not a bad trade off.
Some people are not emotionally able to look past today’s market noise and frightening headlines and maintain a long-term focus. Their fear of the stock market cannot be eliminated by a reasoned, intellectual explanation of the benefits of long-term equity investing. These folks will never be successful investors — they are savers.
I left the interview with my potential client knowing that I wouldn’t be able to help her. Her fear of stock market volatility caused her nonsensical flight to cash. For her, peace of mind comes from cash in the bank. Financial advisers can do more harm than good when they try to “convert” a saver into an investor — even when it is done with the best intentions.
Few people who shun stocks will be able to save enough money to build a nest egg large enough to sustain them in retirement. For those trying to do so, I have little advice to offer except, “Save a lot, you’re going to need it.”
This article originally appeared on MarketWatch.com and is reprinted by permission from Marketwatch.com, ©2015 Dow Jones & Co. Inc. All rights reserved.