The late John Kenneth Galbraith once famously said “The sole function of economic forecasting is to make astrology look respectable.” Staying informed is important but placing too much weight on long-term forecasts can often leave investors misinformed and lead to poor decisions. As long-term money managers, we train our clients to see past this noise and “forgo the fluff” of the financial media.
This month’s client’s corner focuses on mainstream financial media. In particular, we will be looking at:
- The business model behind the financial media, and the importance of getting clicks.
- The biases investors should be aware of when following financial news.
- Important financial planning strategies to help you counter inconsistent economic forecasts.
How do media outlets make money? Why are clicks so important?
Media outlets make money from advertisers. Companies pay news providers to show ads on-air and on their websites. These ads are often tailored to the viewers and success is measured based on clicks. The more clicks a media outlet can deliver, the more demand from advertisers, the more money the outlet makes.
What biases should investors be aware of when following financial news?
Negative news sells. Often referred to as the “bad news bias”, the simple fact is that human psychology drives people to have strong emotional reactions to negative headlines. News outlets know this and try to exploit this gap in human psychology because it ultimately results in more clicks and more revenue. Financial markets are resilient. They have crashed, recovered, and reached new high’s time and time again. Don’t get sucked into the endless stream of doom and gloom headlines. Stick with your long-term plan and you will come out on top.
Are there any financial planning strategies that can help investors counter inconsistent economic forecasts?
The first strategy is to segment your investments into three-buckets based on when you need access to those funds. The general idea is to have 1-2 years of cash in a short-term bucket, 3-6 years in your medium bucket with slightly more risk, and everything else invested into equities or real estate for the long-term. This approach lays the foundation for success no matter what picture is painted in the financial media. Learn more about this strategy here
The second strategy is to implement “dollar-cost averaging” in your long-term bucket. Say you invest $1,000 at the beginning of every month into a simple S&P 500 index fund and say this buys you 10 units today. Let’s say next month the market goes up and that $1000 only buys you 9 units at the more expensive price. No problem, you’re buying less at the higher price. Now let’s say the month after that the market goes down and that $1000 is now able to buy you 11 units. Perfect, you’re buying more at the lower price. That is the beauty of dollar-cost averaging. Buy more when prices are low, less when prices are high.
Summary
At the end of the day, always remember to view anything you hear or read in the financial media with a critical lens. Remember that news outlets make money from attracting eyeballs and getting clicks and the best-performing articles are usually the ones with negative headlines. Stick with your plan, look past the noise, segment your investments into buckets, and utilize dollar-cost averaging, and over the long run you’ll come out on top.
Thinking about hiring a professional to help you implement strategies like those mentioned in this article? We would be more than happy to set up a 30-minute discovery call to get a better understanding of your unique situation.
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