What do the headlines, “Bubble Bursts: Iron Laws of the Market Bring a Sharp Dose of Reality,” (Guardian) and “Stocks Fall on Last Day of Nasdaq's Worst Year,” (Los Angeles Times) have in common?
They’re the type of headline that could encourage people to call their financial advisors for fast action – or, if they’re enrolled in an automated investing program, to personally take action – and sell stocks in an effort to avoid losing money as stock values slide.
“These headlines can often stir emotions that make people want to change their investment strategy,” said Brad Kudick, senior financial advisor with U.S. Bancorp Investments. “They have the potential to cause a knee-jerk reaction, and that could negatively affect returns over the long run.”
Reacting to these negative market headlines can actually cause people to lose out on the opportunity to earn more money over many years.
“For long-term investors, daily headlines are distractions,” Kudick said. “History has shown that acting upon market news can be detrimental to a retiree’s retirement plan. A successful retirement is based upon a well thought-out financial plan, and having the discipline to stay with it, long term.”
Consider what these headlines have in common. In addition to possibly scaring investors into taking action, they also were published on the same date: Dec. 30, 2000, during the dot com bubble. Yet, they are remarkably similar to the following two headlines, published in the last year in the Wall Street Journal:
“Dow Industrials Tumble after ‘Brexit’ Vote” - June 25, 2016
“Dollar Tumbles as Weak Data Clouds Rate Outlook” – Sept. 6, 2016
The graphic shows historically, over a 20-year period, how staying with investments in several different asset classes as well as different asset allocations performed compared to the average investor. What is striking is that the average investor over that 20 year period barley beat the rate of inflation. The lesson learned is that investors need to focus on their long-term goals and focus less on moving in and out of the market based on the latest news headlines.
If tomorrow’s headlines show stocks sliding, here are three steps Kudick recommends reviewing before deciding to take action:
1. Revisit why you're investing. Ask yourself: What is my goal and investment timeframe for the funds invested? Are you investing for a large purchase such as a new house, funding a child or grandchild's college fund or investing for retirement? If your timeframe is three years or less, consider investing in a more conservative portfolio that consists of short-term bonds or cash equivalents. However, if your time horizon is longer term, a well diversified portfolio consisting of stocks and bonds is suggested.
2. Review your current asset allocation. Your asset allocation should match your risk tolerance. When you first set up your portfolio, hopefully you took a diversified approach and spread your assets amongst stocks, bonds, cash equivalents and other specialty assets. If your risk tolerance has changed, then maybe it’s time to make changes to your portfolio. However, if it hasn’t, and your portfolio is well-diversified, then you may want to consider leaving it untouched.
3. Review your overall financial plan. This includes all of your expenses, income sources and your investments. Determine if everything is still on track to meet your financial goals. Asset allocation is an important feature of the overall financial plan, and if one of your goals changes, then consider making changes to your asset allocation.
One situation where Kudick does pay attention to the headlines is when the news reports a Congressional or legal change that has the potential to affect the performance of a portfolio on a permanent basis. For example, if a headline says: “Congress is eliminating estate taxes,” this headline could affect individual portfolios that are constructed with estate objectives in mind. However, Kudick recommends against making impulsive changes. Instead, he suggests investors go through the three steps listed above to determine actions that may best suit their portfolios as they work toward their goals.
“For the majority of situations, if you don’t have a reason to adjust your portfolio – such as changing your financial goals - then be wary of the emotions provoked by the headlines and leave your portfolio untouched,” Kudick said. “Be sure to reach out to your financial professional if a headline causes you concern, or if you want to review your investments.”