Media outlets covering hour-to-hour, even minute-to-minute, financial news appear to be treating the stock market like ‘College GameDay’ every day.
What if you woke up, turned on CNBC, and Jim Cramer said “don’t worry about the latest durable goods report, consumer confidence report, etc. It will not matter in the long run. Pick diversified investments that match your long-term financial plan and stick to your financial plan. That is more important. Have a nice day.” This of course, would never happen.
Media outlets make money based on “breaking news.” But is any piece of financial data really news breaking? Does a 0.1 percent slowdown in durable goods mean that the long term earnings power of Apple is diminished? It seems that CNBC and shows like them have taken on a “College GameDay” feel where each bit of news is perceived of great importance. Market pundits attempt to decipher the information for the investor. But is this investing or speculating? I believe that an attempt to make short-term moves in long-term investments is often nothing more than speculation.
In a minute-by-minute, hour-by-hour situation, it is impossible to interpret these pieces of information anyway. I have seen situations where an economic report is supposedly the cause of a morning pullback and later in the day when the market turns around, a different news agency uses the same report for the reason the market moved up.
Heeding the advice of the pundits instead of sticking to your plan can have dire consequences. Investors following Jeremy Grantham’s (British investor and co-founder and chief investment strategist of Grantham Mayo van Otterloo,) advice in October 2009 when he said, “this is the last hurrah” will be sad to find the market has moved up over 60 percent since then.
Similarly, in August 2011 when the Dow was at 11,384 (now up 40 percent as of January 2014), John Mauldin (Financial Expert, Best-Selling Author, and Editor of Thoughts from the Frontline Investment Newsletter) said stocks would fall 40 percent. And in October 2012, David Tice (mutual fund manager) warned that the market was like 2008 right before it crashed. Instead of falling, the Dow Jones Industrial Average is nearly now 20 percent higher. If you want more, Google the term “The Idiot-Maker Rally: Check Out All Of The Gurus Made To Look Like Fools By This Market.” You will see the three examples above and 32 more times in the past few years that the experts got it wrong.
What is an investor to do? Answer: Stick to your financial plan. Chances are you, the investor, are looking to grow your money until retirement, or you need your investments to fund a retirement income stream. In both cases, part of the portfolio will most likely need to be in diversified growth investments, represented by companies that make up the stock market and a growing global economy. In the end, companies are valued based on their earnings’ capability and their valuation is reflected in their respective stock prices.
When I was born in 1972, the S&P 500 index stood at around 109. As of the middle of January, it was around 1,800, an increase of nearly 16 times. Not so coincidentally in my opinion, earnings for the S&P 500 over the same period have increased from 6.23 to 95.41, an increase of 15.31 times, according to politicalcalculations.com.
Please know that I am not predicting the market’s future or making a market call. The next 10 or 20 percent move could be down just as easily as it could be up. I am simply saying that your investments should match your long-term goals. And, it seems to me that more time should be spent putting together an investment portfolio that makes your long-term financial plan work, instead of worrying about the next economic report, or the latest breaking business news. This is just another compelling reason for independent financial advisors to “stick to your financial plan!”
Michael E. Fayed, certified public accountant, certified financial planner, owns Michael E. Fayed Financial Planning at 420 Park St., Suite 100, in Belmont, NC.
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