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The Raffer Investment Group

Why You Should Turn Off The News

Why You Should Turn Off The Financial News

by Jeremy Raffer

 


It’s no secret that major television networks make millions through advertising. They sell ads to companies and in exchange those advertisers get viewership. Audience is everything, and affects politicians, television networks, and marketing. Unfortunately, sensationalism and bad news sells; we live in a time where attention is power. If the media reported in a levelheaded and objective way, they simply wouldn’t get as many people to watch.

 

Table Of Contents:

Financial News Speculation

Ratings and Money

Why We Listen

What To Do

 

Financial News Speculation

Financial news stations have done a great job at deducing what will get people to tune in.  They know people want to get rich quickly--I know, groundbreaking. They also know from Biology and Psychology that humans are hardwired to react more strongly to bad news. This is no surprise when you remember that our ancestors long ago were living in caves, hunting for food, and fighting for survival. A cautious attitude was rewarded, it kept them alive.

 

Unfortunately, fear programming has stayed in place and can have quite an impact on our decision making. The TV stations play right into this with people like Jim Cramer of CNBC’s Squawk Box and the other talking heads getting prime time spots prognosticating markets, suggesting which stocks to buy, and forcasting what financial doom or fortune is going to happen next.  The most important question, is do they actually know anything or are they just taking advantage of our programming? Incredibly, a couple of students at Wharton actually studied Cramer’s “Action Alerts PLUS” portfolio over a 16+ year period and discovered some interesting results.  The AAP portfolio produced an annualized 4.08% return while the S&P 500 did 7.07% during the same period--proving not only that his advice is not going to make you money, but that it is dangerous for your portfolio.

 

Ratings and Money

It’s unfortunate that despite proof that news and media icons sensationalize and spread false information, they remain on the air and highly watched. In fact, on September 29, 2008, when the markets faced their worst single session performance since the crash of 1987, CNBC saw its best ratings ever with an average 726,000 viewers tuning in during the business day.  Its obvious that consumers are hooked and the worse things get the more they watch, hoping that these charlatans know something that will protect them or make them rich.

 

Now I know that "charlatan" is a harsh word, so lets examine if I’m being fair or unduly critical.  The S&P Dow Jones indices has been tracking the ability of fund managers, the very same "experts" you see on the news,  to outperform their benchmarks for years. At the close of 2017, the SPIVA US Scorecard showed that 63% of large-cap domestic funds did not beat the S&P 500. What’s even more astounding is that over the preceding three years 80% failed to beat the index. And even worse, the 15 years preceding 2017 showed 92% failed to outperform the S&P 500 index.

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This trend also exists in mid-cap funds and small-cap funds--both domestic and internationally.  The longer “professionals” try to advise on the markets, the worse they get.  So why do we trust them with our money?

 

Why We Listen

 

Inevitably  people think that they can find the kernels of gold,  that they have a unique insight and can be the 8% who outperform. Unfortunately, an annual report published by the company Dalbar compares the average annual returns of equity investors against the S&P 500 index. This report found that in the 30 years preceding 2016, investors in equity funds averaged 3.98% annually, while the average return for the S&P 500 was 10.16%.

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Source: 2016 Dalbar QAIB

 

The disparity in returns is significantly more dramatic than we usually see quoted because it shows not just the underperformance of the funds, but also the result of bad investor behaviors. People getting in and out of their investments at the wrong times, as opposed to staying put and reaping the rewards is the primary cause of underperformance.  This is no surprise really when the prevailing media messages are to buy this now, get out of that immediately, and make these changes or else. It's a sobering realization that people who don’t have success investing are struggling because of their behavior, not their investing acumen.

https://admin.emeraldconnect.com/files/94818/investment%20return%20vs%20investor%20return.png

Source: “The Behavior Gap” by Carl Richards

 

Evidence from the reports suggests that professionals can’t outperform their benchmarks and investors can’t determine when to be in and out of their investments. It can become hard to imagine how anyone can justify the active management of an investment portfolio.

 

What To Do

So what next? You know everyone on television is trying to sell you something. Financial mass media sensationalizes data and bad news. Investors can't keep up with their own benchmarks.  Unfortunately there’s nothing exciting about the most likely way to succeed in investing, diversification and patience.  I know that’s not fun and its human nature to want to beat the market, but the evidence shows that it's impossible for anyone to do it consistently.

https://admin.emeraldconnect.com/files/94818/you%20your%20advisor%20big%20mistake.png

Source: “The Behavior Gap” by Carl Richards

 

This is why our clients have a well-diversified portfolio made up predominantly of ETF’s (indices you can buy indirectly) in a composition that is consistent with what they’re trying to accomplish, and an expected volatility level that they can tolerate.  All this is done because it’s our job to maximize their chances of success.  That means we set our egos aside and do what works. After that, it’s up to us as their advisors to gain their trust and have a deep understanding of the client’s wants and needs. That way when a client is thinking of making an emotionally-charged decision, we can assess the risk of doing something vs staying put and keep them on course.

 

So, I’d recommend you turn off the news and turn down the radio; it may be the simplest way to increase your returns.

Learn more about our Financial Planning Services.

 

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Jeremy Raffer, MBA
Wealth Manager
 
Phone – 201-773-4641
 
Any opinions are those of Jeremy Raffer and not necessarily those of Raymond James. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned.
 
*Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.
 
There is no assurance that any investment strategy will be successful. Investing involves risk and investors may incur a profit or a loss. Prior to making an investment decision, please consult with your financial advisor about your individual situation.