Honey, call our financial advisor!

We live in the so-called “information age.” We intake news and data like we breathe air: everywhere, all the time. And we are subconsciously trained to react to each new (to us, at least) headline: an emotion, an opinion or provocation to action. (Marketers understand this all too well.)

“Honey, call our financial advisor!” Admit it. That’s the temptation when we see negative, market-moving news. It would be irresponsible not to inform our advisors what we heard; it would be imprudent not to change course. Right?

My response to news-driven investment course changes is typically “no.” For most, investing based on news flow and timing market entries/exits is neither a viable nor sustainable investment strategy. It can do more harm than good.

Market corrections are normal and healthy

The Efficient Market Hypothesis theorizes that investment markets are informationally efficient, and security prices reflect all publicly available information. Assuming that is true, it would be very difficult to gain any competitive edge over other investors based on the news. Yet some still try.

We have an inside joke in our office about this. “Did you read in today’s Wall Street Journal about (this or that)?” “No, but I heard about it two days ago!” By the time you read about it in the mainstream media, it has already been “discounted” or baked in. That is informational efficiency.

“Bill, the markets are correcting, and I don’t want to lose all my money.” Firstly, market corrections are normal and healthy. Time and patience can heal these wounds. Secondly, the time to protect oneself from risk is before, not after, the event.

If you guess once, you have to guess twice

Consider the following example: Two years ago, with interest rates having been held at the zero-bound in the face of rising inflation, we reduced clients’ exposure to the most interest-rate-sensitive bonds in anticipation of, not in response to, rising interest rates. We made tactical (short-term) adjustments to strategic (long-term) investment plans. If we had waited for rates to meaningfully appreciate, we would have been too late. Last year, the Bloomberg Barclays U.S. Aggregate Bond Index declined over 13%!

“Bill, I want to protect myself against (some future event).” Assuming the risk is credible, such as an overvaluation (e.g., tech bubble), the challenge is timing. Markets can move far higher for far longer than valuations support. (The same is true going the other direction.) In the example above, we could have been wrong in our timing and missed out on continued gains, incurring an “opportunity cost.”

In summary, most long-term investors would do well to follow the following advice: 1) turn off the noise (news); 2) stick to your plan; 3) periodically rebalance (trim that which has risen the most and add to that which has lagged the most).