DON’T PICK INVESTMENTS BASED ON THE LATEST “NEWS”
Some investors have one eye on the news of the day to see how it may affect their stocks, bonds and other holdings. And many events do influence the performance of investments — in the short term. But if you’re going to invest successfully over time, then it’s important to look beyond today’s headlines.
Part of the problem with making investment decisions based on news events is that the market reacts to such a wide variety of occurrences — earnings shortfalls, increases in inflation, political instability, etc. You can’t predict such events, and you can’t always tell how they will affect your investments.
This element of unpredictability is compounded by the fact that the market doesn’t just react to news — it often overreacts. Bad news moves it down, while good news moves it up, but the level of movement is sometimes driven more by emotion than by logic. You’ve probably heard that “greed and fear drive the market” — and unfortunately, there may be a great deal of truth to this theory.
Instead of making investment decisions in reaction to daily headlines, you’re much better off choosing investments based on more meaningful factors. If you’re considering a stock, look at the fundamentals of the company. Is its management sound? Are its products competitive? Does it have a solid business philosophy?
You also need to ask yourself if a stock will be a good fit for your diversified portfolio. Suppose, for example, that you have found a growth stock that you like. You’ve done your research, you understand the company, you’re impressed by its management and you’re convinced its fundamentals are strong and its outlook is bright. Sounds like a great stock to buy, right? Maybe — and maybe not. If your portfolio is already strongly weighted toward growth stocks, then the addition of one more — even one that looks quite promising — could throw off your overall balance and even subject you to more investment risk than you’re comfortable with. In short, keep the idea of “balance” in mind before you buy. If you can concentrate on a stock’s fundamentals and its effect on your overall portfolio, and if you can maintain your long-term focus, then you’re far less likely to be swayed into making investment moves that spring from whatever events are currently making news.
Still, you won’t want to ignore all the news. If you see a pattern of stories that indicate a particular industry or company is heading into a long-term downward spiral, then you may want to review your holdings. Just make sure you’re not responding to what may be a one-time or short-term event.
There’s an old saying that “today’s newspaper is tomorrow’s trash.” If you can keep those words in mind, you’ll probably be a happier — and more productive — investor.
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