It has long been my view that much of the financial media serves as a shill for the securities industry. It stokes fear and anxiety in an effort to encourage investors to “do something” with their holdings. Activity means trading, and trading means higher profits for bloated brokerage firms. It’s really not more complicated than that.
The recent market sell-off provides ample fodder for this behavior. The media has gone into overdrive, with breathless reporting from the floor of the NYSE to an endless parade of market “gurus” offering “explanations” for the sell-off. They convey the impression that they have a deep understanding of what drives market prices. The import of their message is that understanding these “reasons” is useful information that investors can use to make decisions about “what to do” now.
Ignore market “explanations”
This blog by Bernard Condon and Ken Sweet, AP business writers, is illustrative. They attribute the market drop to fears about China, plunging oil, disappointing profits, technical indicators and “rate jitters.”
These issues were well publicized long before the market drop last week. They don’t explain why investors suddenly took them into account and dumped stocks.
There are notable exceptions. Ron Lieber at the New York Times authored an excellent blog in which he wisely counseled investors to “take some deep breaths, and don’t do a thing.”
Elena Holodny put the sell-off in perspective, noting: “Sell-offs happen. Sometimes they’re big. But they’re normal, so there’s no reason to panic.”
What Wall Street doesn’t want you to know
Here’s what Wall Street doesn’t want you to know. Financial crises happen with depressing regularity. You can find a list of some of the crises that have occurred since 1973 here.
When you consider the data, it appears we have a crisis about once every three years. What matters is not the fact that a crisis has occurred, but rather the long-term performance of the domestic and international stock market before and after the crisis period. From 1970 through April 2010, the S&P 500 (domestic) and the MSCI EAFE Index (International), both returned about 10 percent annualized.
The phony 401(k) issue
When all else fails, the media will play the 401(k) card. How many times have you heard that “investors are worried about the value of their 401(k) accounts?”
This appeal to fear is particularly insidious and misleading. 401(k) plans are typically long-term investments. If you have even a modest time horizon, short-term declines in the value of your 401(k) plan should be irrelevant.
In 2008, a portfolio with moderate asset allocation of 60 percent stocks and 40 percent bonds lost 24 percent of its value. If you did nothing and held on for one more year, you would have recovered all those losses. But look what happened if you held on through the end of 2014: Your annualized returns would have been 6.2 percent.
Here’s the takeaway:
The pundits don’t have a clue why the market lost value or when it will recover. Ignore them. Focus on the long term with a globally diversified portfolio of low management fee index funds.
History teaches us a valuable lesson. The market will look very different in three years or more than it does today or tomorrow.
This commentary originally appeared August 25 on HuffingtonPost.com
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