News headlines today are designed for clickbait and sensationalism
Decades ago, the news was meant to inform readers. These days, however, the news is dominated by clickbait headlines and a huge appetite for sensationalism.
With the rise of social media, this problem has actually gotten worse. People prefer to get news from their favorite outlet even if that news is biased and wrong.
Then, there is an overload of information as people are connected through their devices for most of the day. People consume more information than ever before but are not necessarily using them to make good financial decisions.
Headlines don’t matter in the long run
Whether it’s the 2000 dot com but or the 2008 financial crisis, long term investors know that these events were just a blip on a long time frame. People were scared at the time of the crash, but long term investors who stayed the course made huge returns.
Acting on headlines will get you whipsawed out of your position
If you read too much into the day-to-day headlines, you will get whipsawed out of your stock positions. Great wealth is built by holding stocks long term through the ups and downs of the market.
Media gets it wrong often
During market crashes or recession, magazines such as Barrons and Newsweek run covers predicting doom and gloom. But history shows that most of those covers are poorly timed.
Many savvy investors use these “Magazine Cover Indicators” to time their purchase. If you buy stocks when the media is predicting doom and gloom, you are likely to make money in the long run.
Take a look at the stocks that Warren Buffet bought during the 2008 financial crisis and see for yourself how they performed in the next 10 years. The stocks bought during the depths of the crisis delivered huge returns. Buy stocks when there is blood on the street, goes an old Wall Street saying
Market timing is hard
Market timing is hard. Profitable buying and selling stocks based on news of the day or week is even harder. Staying the course, and not tweaking your portfolio based on the news is the best course of action for most investors.
So what does an average investor do? Do they simply not read the news?
Be informed, but don’t act on every news headline
As an investor, you must stay informed. But don’t overdo it, and don’t make adjustments to your portfolio based on the news. Periodic re-balancing or changes to asset allocation is fine, but don’t buy or sell stocks in your portfolio because you read some article predicting a fed cut or an epidemic in Africa or a recession.
Dollar-cost average and re-invest dividends
Volatile markets are good times to dollar cost average into stocks. It’s also great if you consistently reinvest dividends. Your average cost basis will be lower as you will be buying more stocks for the same amount when the market goes down.
Bottom Line
Be informed but don’t act on the sensational headlines. Acting on day-to-day news will not make you a good investor. Sticking with a diversified portfolio of stocks for the long haul is the best way to build wealth. Long term investors can benefit from news-related volatility by dollar-cost averaging and reinvesting dividends.