The Market and the Media
Warren Buffett famously proclaimed, “Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.”
Take the last six months. First we experienced the “Trump Bump,” when stocks increased over 10% between November’s Election Day and February. Then on March 21, media talking heads began to weigh in on the “Trump Slump” because the S&P 500 fell 1.2%.
Attention investors: the stock market is volatile in nature! You should not be fazed when volatility appears. The stock market frequently goes down more than 1% in a trading day. Most investors under-perform the market due to irrational behavior, which can be incited by media windstorms. You will nearly always fare better by ignoring the media.
Fear, media-incited or not, may be investors’ greatest motivator because it has a biological basis in our survival as a species. The pain of an investment loss has roughly three times the magnitude of the pleasure associated with the same dollar amount of gain. Behavioral economists call this “loss aversion.” Unfortunately it takes over our ability to see long-term, and ironically can cause us to lose more in the long run. Modern economies are designed for the long-term, but our brains still react as if we were on the savanna on the lookout for lions.
Understand the difference between buying and investing. Buying and selling short-term is speculating and market timing, not investing. Speculating is simply hoping someone will pay you more than you did for what you bought. Investing is buying because you believe the asset will produce dividends or interest or will increase in value. It is a belief in the long-term viability of a company or an economy, and it is a long-term activity.
Are you inclined to make investment decisions based upon events that do not matter, like the Dow hitting 20,000? If so, you are also likely to go to cash quickly at the first sign of trouble, like the failure of a healthcare reform bill. This is exactly why many investors, including so-called professionals, do not make money in the long run. If you think you are likely to pull your money out within a few years, you should not be in the stock market.
I talk to many folks who dream about selling out of the stock market right before it goes down. I do not understand this. Apparently the next step is to get back in right before stocks go back up, then get out again before the next decline. This is about as plausible as picking a perfect Final Four bracket. Why waste time thinking about it?
Instead, focus your investment plan on achievable goals, like developing a simple risk management strategy of diversifying your money across different asset classes. Your investment portfolio should provide you with income and grow over time at a comfortable rate for you. Everyone has different dreams and aspirations. You want a mix of assets that meet your goals no matter what the news says or the stock market does.
An edition of this column was featured in the April 9th Knoxville News-Sentinel. You can read the News Sentinel version here: Know the difference between buying and investing.
Meet the Author
Tom Coulter, CPA
Tom is the President and a founder of Meridian Trust. Tom graduated from The University of Tennessee, Knoxville, in accounting with honors, in 1978. Tom previously worked for the international accounting firm, Deloitte. He later joined the financial medical advising firm, FIS Associates, before founding Meridian Trust in 1997. Tom has worked extensively in retirement planning, taxation, estate and financial planning and investment management. He is a Certified Public Accountant, a member of the American Institute of CPAs (AICPA), and the Tennessee Society of CPAs (TSCPA).
Tom is also credentialed as a Personal Financial Specialist (PFS) by the AICPA.