Dealing with the News
The news. It happens everyday. It's relentless. It's entertaining. It's exciting. It's addictive. From a personal finance perspective, it's useless.
We give news a very short leash; not that we think it's "fake," but that media incentives are not aligned with yours or ours. For us, the value of news is that it tells us what the readers are probably thinking and feeling, and we can take that as a cue to do something different.
The essay, Avoid News, by Rolf Dobelli, first published in 2010, frames our attitude about news. A more recent echo by Bob French at the Retirement Researcher can be found here.
A recent Vanguard paper concluded, "....our analysis of the relationship between economic surprises and asset returns yields two insights: First, the odds of successfully trading on surprises are low. Second, what can seem consequential in the short run is irrelevant to the long-term investor. Short-term surprises are quickly priced into long-term expectations..."
In the May, 2011, CONSIDERATIONS, I wrote, "There has never been a case where news changed the underlying trend of a major market index." I'll stand by that.
Here's what you can do to sidestep the temptations and minimize the risks of consuming too much news:
1. Just turn off or change the channel. Go for a walk.
2. Spend less than you earn (unless you're already financially independent).
3. Maintain sufficient liquidity. We call it the Five-Year Rule. This allows to ignore the day-to-day noise.
4. Invest automatically. There's only one decision to make: When to begin.
5. Pay attention to asset allocation. They have guardrails for a reason.
6. Keep investment costs low. Costs subtract from what you get to keep.
7. Stay the course. Robust strategies work in the long run. That's why they're called robust.
8. Get out there and live your life!
Q: But. But. But. I'm afraid a huge market crash is coming and I'm thinking about making my portfolio very conservative. What do you think?
A: In the short-term the market is random. For us, the "short-term" is anything less than five years. We use five years because, historically, cash is just as good as stocks in that span. Beyond five years, the odds start shifting in favor of stock investors. This also means that any money earmarked for spending in the next five years ought to be parked behind a stock market firewall.
This consideration is part of setting a deliberate asset allocation policy, and asset allocation policy should be what drives portfolio decisions. It's the "portfolio power tool" that helps sidestep the hopes and fears that arise when we start "thinking about" stuff and reacting to news.
11-25-18
Q: Is there a way to invest in companies engaged in fighting climate change?
A: We believe climate change is a done deal-- that it is not reversible in our lifetimes-- and that the impacts are likely to become more frequent, serious, widespread, and long-lasting. (See the long-read references below.)
We believe it's impossible to confidently know ahead of time which companies might successfully deliver solutions for preventing, responding to, or adapting to climate change. Some existing companies will succeed, some won't. New companies will emerge; many will fail.
11-25-18
References:
Fourth National Climate Assessment (Added 12-1-18)
Global Inequalities in CO2 Emissions (Added 12-1-18)
The 2018 Report of the Lancet Countdown on Health and Climate Change (Added 12-1-18) Registration Required (Free)
CO2 Emissions on the Rise (Added 12-1-18)
A Kind of Dark Realism (Added 12-6-18)
Q: How will trade tariffs impact our investments?
This is one of those newsy things that sounds so important. But the truth is, businesses and investment managers are already making adjustments that reflect their best estimates of the effects. They will continue to do so as trade news evolves. Hence, the effects are already being "priced in" to the market. So we don't see any edge or advantage to be earned by trying to guess what the impacts will be.
11-25-18
Q: You often make reference to a globally diversified portfolio. What is that, and how would a person have one if they wanted it?
A globally diversified portfolio contains simultaneous investments in four different asset classes: US stocks, Non-US stocks, US bonds, and Non-US bonds.
Different investors will hold different proportions of each asset class, depending on their needs and prior asset allocation decisions. Know that investors all over the world tend to hold more of their own country's securities than others. This is called home country bias.
Globally diversified portfolios can easily and cheaply be constructed using four individual funds or ETFs, or by using just one or two balanced funds or ETFs.
12-2-18
Q: What are FANGs?
Actually, it's FAANGs. It's a media-inspired acronym for five leading technology stocks: Facebook, Amazon, Apple, Netflix, and Google (Alphabet). Surely the definition of "technology stock" has been ridiculously modified. But that's what media does.
More importantly, four of those five companies (Facebook, Amazon, Apple, and Alphabet) are among the Top 10 in market value of the S&P500, and together, all five account for about 12% of the S&P500's total market value. So, what happens to these stocks has an impact on the 500.
11-25-18
