Your Biggest Enemy May Be Financial News

Reading too much short-term financial news can hurt your returns.

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It’s been quite a year for the stock market. On November 22, the Standard & Poor’s 500 index closed above 1,800 for the first time, and the Dow Jones Industrial Average set a record high by closing above 16,000. The S&P 500 is up 26.5 percent year-to-date, prompting inane comments like this one from Drew Nordlicht, managing director and partner at HighTower San Diego: “We’re advising our clients to take this ride until the end of the year.”

Daniel Solin
Daniel Solin

Neither Nordlicht nor anyone else has a clue whether this “ride” will last another day or another year. Yet the financial media pump out a steady stream of “news” and encourage investors to pay close attention. I am convinced investors would be better served if they didn’t pay much attention to most of the financial media.

Bryan Harris, senior editor at Dimensional Fund Advisors, reviewed selected headlines in the financial news for 2012. He cross-referenced them to the performance of the Russell 3000 index to track U.S. stock market performance, and to the MSCI All Country World index to track world stock market performance. The results were fascinating.

Both indexes reflected very strong returns. The Russell 3000 index had an annualized return of 16.42 percent as of Dec. 31, 2012. The MSCI All Country World index performed nearly as well, with an annualized return of 16.13 percent. However, if you were tracking the news and basing your investment decisions on the headlines, it’s unlikely you would have achieved anything close to those returns.

In the U.S., headlines started 2012 by warning about “worldwide gloom” and a “long-awaited wakeup call” for stocks. In the second quarter, pundits noted the worsening housing crisis, fears of a recession and poor job numbers. The third quarter was met with more dire news. Bill Gross, the “king of bonds,” predicted “the death of equities.” Household income fell to the lowest levels since 1995.

If you listened to the news in the fourth quarter, you would have considered  fleeing to safety,  as many “experts” recommended. There was a shift in focus to the fiscal cliff, the largest decline in the price of Apple shares in four years and a concern that the deficit reduction would crush stocks.

Investor looks at investing graphs and charts

In its totality, these headlines gave investors ample reason to flee the stock market, and many probably heeded this advice. The news from international markets only served to increase fear and anxiety. The first-quarter headlines noted a shrinking economy in Germany and a looming recession in Europe, which might pose a  global recession threat. In the second quarter, investors were warned about how a slowdown in China could spur global recession, bad economic news in the U.K., a worsening of the economy in an already battered Greece, a decline in oil prices due to sputtering economic growth and a worsening of the economic crisis in Spain.

There was little respite in the third quarter. Moody’s downgraded global banks. A civil war erupted in Syria. A manufacturing downturn spread gloom across Asia and Europe and the United Nations urged action to avert a global food crisis. One July 5, 2012, headline from The Wall Street Journal summarized: “The Bottom Line: Central Bankers Are Worried.”

There was no respite in the fourth quarter. The International Monetary Fund warned about a “global recession risk.” The World Bank saw a “long crisis effect.” Wheat prices soared after a Russian crop failure. Japan fell into a recession. European Union budget talks collapsed.

Whew! What a mess.

This may be a good time to repeat U.S. and world market returns for the one-year period ending Dec. 31, 2012, after these headlines had been being read by investors all over the world. The Russell 3000 index had an annualized return of 16.42 percent. The MSCI All Country World index had an annualized return of 16.13 percent.

If you had the psychic ability on Jan. 1, 2012, to know these headlines would be blaring throughout the year, you probably would have dumped your stocks and bought precious metals or stayed in cash. The annualized return of a three-month U.S. Treasury bill as of Dec. 31, 2012, was a measly 0.11 percent. The Dow Jones UBS Commodity Total Return index fell 1.06 percent. Both fixed income and commodities were bad bets.

I remain confused as to why investors are so fixated by financial news. Many are under the mistaken belief they can gain an edge in their investing decisions by absorbing as much of this news as possible. Some investors have told me they keep CNBC on in the background all day. When I ask them what they are listening or watching for, they are unable to give me a coherent response.

I can find no credible data indicating any relationship between keeping abreast of financial news and increasing your investment returns. The opposite seems to be true: Paying close attention to the financial information du jour probably contributes to “negative alpha.” The only “increase” I have observed is in the anxiety and stress of those who engage in this practice.

Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth advisor with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His next book, “The Smartest Sales Book You’ll Ever Read,” will be published March 3, 2014.