The terrorist attacks in Brussels, Paris and Pakistan are reminders that we live in a dangerous world. While we mourn the loss of the victims, it’s important to make sure that emotional responses don’t harm our investment decisions.
That advice is good not just in the face of terrorism, but all the time. Rash investment decisions usually don’t pay off.
Here’s one way to avoid a mistake — take a TV news fast. Or, limit what type of television you consume and how much of it. Try the same thing with other media, too.
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Reacting with horror, disgust and sadness at those attacks and other atrocities are signs of the humanity in all of us. But those same emotions also tend to have a bad influence on investing decisions.
The news industry maxim, “If it bleeds, it leads,” is actually all too true in the world of television. If there is carnage, it will be at the top of the evening TV news or the front page of a newspaper. If you watch too much of that news, then it will undoubtedly unsettle you. It’s also true of other forms of media, but moving pictures do have a profound emotional impact — more so than printed versions.
“The parallel to food is really pertinent; If you want to eat buffets all the time you can do that, but it won’t be healthy,” says Wall Street veteran Barry Ritholtz, chief investment officer of Ritholtz Wealth Management in New York.
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The same is true with media, but avoiding consuming too much is just as hard as staying on a diet.
“I can’t do a full-on media fast,” Ritholtz says. “But during the day I don’t want to be influenced by the intra-day ups and downs the market; giving into your fears won’t help over the long haul.”
Those are the fears which the news business thrives on and can, quite understandably, get under your skin, perhaps causing you to sell when stock prices are low — the exact opposite of what you should do.
Consume nutritious media. Ritholtz doesn’t completely avoid the media, which for most people would be hard, if not impossible. Instead, he deliberately decides what sorts of media he will consume.
It involves seeking out a variety of points of view and making sure he keeps a balance between avoiding total immersion in a topic, and not being totally ignorant. He publishes a list of things worth reading on his blog, TheBigPicture.
He’s not the only professional who tries to limit the amount of TV and other news.
“I sometimes go on TV, and when I do, I tell my clients not to watch me,” says Barry James, president of James Investment Research and chief investment officer of the James Advantage funds. “It just stirs you up inside and does you no good.”
Don’t watch TV for investment advice. James says he’s as emotional as anyone else and the way to avoid problems has a few key elements. Don’t take investment advice off the TV, he says. “You don’t want to be influenced by the herd because they are almost always wrong.”
And investors need to know themselves — understand what type of investments make sense for their financial goals and mental health.
For instance, will it bother you if the value of the stocks you own are constantly skyrocketing and then plummeting? If that won’t phase you, then maybe try investments in small capitalization companies, like those held in the iShares Russell 2000 (ticker: IWM) exchange-traded fund. Small-cap stocks tend to see much greater percentage moves than larger companies.
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If such volatility is a problem, then maybe pick blue-chip companies that pay healthy dividends, like some of those in the Standard & Poor’s 500 index. They tend to make smaller price movements both up and down.
Don’t be ruled by your emotions. Investors should stick to a discipline, James says. For example, if after consulting with your financial advisor you decide that your portfolio should be 70 percent stocks, then stick to that strategy. Resist the temptation of selling all your stock allocation the moment that the market dives, like it did last August and again this January.
The smart move at those times would have been to buy even more stocks, but that can be emotionally difficult for most people.
“When I talk to people I get them to understand that emotions are part of us, but that they shouldn’t take any financial actions based on those feelings,” says Daniel Keady, senior director in the advice and planning strategy group at TIAA-CREF.
Keady also practices what he preaches. “If I am thinking about investing, I try keep away from disturbing things,” — such as wall-to-wall TV coverage of atrocities.
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How Taking a TV News Fast Makes for Better Investing originally appeared on usnews.com
