Can you imagine going one day without checking your brokerage account, turning on CNBC or tracking the stock market’s movement? What about turning off the news alerts on your phone? A New York Times tech writer just spent two months ignoring the constantly updated world of online media and deemed the break from real-time information and half-baked news feeds “life changing.” I suspect investors could gain a lot by following his lead. Focusing on short-term events is the root of many investing errors.
Fixating and acting on what is happening right now can make investors worse off. Because breaking news carries a sense of urgency, it can trick you into believing the latest development is the most important, relevant and predictive thing for stocks. Look no further than the sudden obsession with Gary Cohn’s departure from the White House. But the present doesn’t predict the future, and short-term developments usually have little to do with corporate earnings over the next few years. They also rarely relate to investing goals, which are usually longer than a day. If you are investing for retirement, you likely measure the time your money needs to last in years, if not decades. For such time horizons, what happens in the short term usually matters less than you might think. To avoid mistakes inherent in a myopic focus and give yourself the best chance of reaching your investing goals, it is important to understand what drives the tendency to focus on the short term and how that can obscure what really matters.
Like all humans, investors tend to fixate on surprises and negatives—a tendency our culture and the media reinforce. Sensational headlines constantly scream, “Look at me! I am important now!” Media messaging can stir investors’ fear and greed—the two emotions that drive reactionary trading most. Even for investors who avoid emotional reactions, it can be difficult to sift through all the noise to know what is actually important.
For example, consider media coverage of President Trump’s now infamous steel and aluminum tariffs. If you focus only on what is happening now as the media reports it, it might seem like this could lead to a 1930s-style trade war that tanks the market. But look at the broader context: History shows US presidents have used targeted tariffs for decades without causing a full-blown global trade war, and markets have risen quite a bit alongside them. Selling out of the market because of such bluster could make you miss out on the stock returns you need to get to your goals.
On the other side of the coin, you might notice in your daily news feed that a certain stock or sector has been booming. With every green ticker you see, you could gradually accumulate regret over missing out on its rise until you can’t take missing out anymore[i] and decide to shift a huge chunk of your portfolio into the latest winner. If this move leaves you less diversified, you could be setting yourself up for sharper future portfolio ups and downs than you can handle. This scenario might sound fanciful now, but a lot of folks did this in 1999 and 2000, targeting high-flying dotcoms. Perhaps you found yourself sorely tempted by cryptocurrencies last year.
Even steeling yourself against emotions doesn’t make you immune to bad decisions from information overload. You can get gobs of data from fixating on daily market information. But contrary to what your gut may tell you, more data can make it harder to know what is actually valuable. One reason: Many data are backward-looking. Since markets move most on the difference between expectations for the future and what actually happens, data depicting the past—GDP, for instance—don’t help you know how to invest going forward. If the data aren’t relevant, how much you have doesn’t matter —they won’t have any predictive power. This is true even if you think you see a pattern. Just because stocks fell on a day when a new report shows GDP growth slowed, inflation sped or durable goods orders dropped doesn’t mean any of those are inherently bad for markets. Exposing ourselves to minute-by-minute data can make us more likely to see patterns in meaningless noise.[ii]
Even relevant data can lead you astray if they show a correlation without an underlying causation. You need both to make a smart investing decision. To see the practical implications of misguided short-term reactions, consider algorithmic trading—programs designed to trade immediately when X, Y or Z happens. When big volatility struck in early February, market researchers suspected programmed trades kicked in near the end of big down days, compounding the volatility and locking in those losses—and putting money on the sidelines just in time for the market to bounce and whipsaw them. If the market drops -4% in a day, it doesn’t automatically mean you should sell, but a program with automatic sell levels has no ability to consider that. It just reacts blindly.
Whether changing your asset allocation, chasing that shiny new investment you just read about or trading on irrelevant daily data, acting on short-term information can be at odds with your goals. So how can you stay focused on what matters? First, know what time periods matter to markets. Splashy headlines often aren’t a big deal to markets, which look 3 - 30 months out. If whatever you are looking at will happen sooner than three months from now, the market’s prices likely already reflect it. If it will happen further out than 30 months, markets probably won’t care until it gets closer. The far future contains too many unknowns for markets to account for—stocks weigh probabilities, not possibilities. So before you make a decision on a piece of news that seems urgent and important, ask yourself: Will the news really matter to corporate earnings or the economy a year or two from now?
Second, focus on your goals, which should always be top of mind when making investing decisions. To maintain that mindset, understand which tendencies pull you away from them. Which emotions make you want to trade the most: Fear? Greed? Fear of missing out? Then figure out what triggers those emotions. Is it spending too much time reading financial news? Checking your portfolio value three times a day? You can make fewer errors if you have fewer risky behaviors.
Lastly, understand how the media works so you can discount sensationalism and the daily volley of information. Not everything you read is important! Being aware of what markets and your portfolio are doing in the short term is fine, so long as you look at events in broader context. Stay informed without obsessing over the day-to-day.
It is unlikely anyone can completely eliminate the natural tendency to focus on the short term. But being aware of—and managing—these tendencies can give you a better chance of reaching your investing goals.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.