When you’re learning to play football, one of the first things any coach will teach you is to watch the other player’s waist. The reason for that is that it’s easy to get faked out by watching the head—or the feet. Just like it can be easy to get faked out and over-react to the blaring headlines of market news.
During the week of August 24, 2015 the U.S. stock market took an impressive tumble on Monday. Tuesday started up but then ended way down. Many financial news article headlines screamed about China, about record declines in the Dow, and all manner of other negative things. By Wednesday and Thursday, the market was roaring back. More headlines, this time about record gains, and GDP. By Friday, the financial press was worried about whether the Fed would raise interest rates.
While that particular week was a dramatic and compressed example, the reality is that new, supposedly market crushing—or market supporting—news comes out all of the time. For most investors, reacting to every bit of news is a bad strategy for many reasons.
Reacting to Stock Market News is Not the Best Reaction
Attempting to trade on the news is extremely tricky. The market reacts almost instantly to any headline or event. By the time the average investor could log on to buy because of good news or sell because of bad, the data is already priced in. In other words, by the time you hear it, it’s already too late. This is why companies release important financial information while the markets are closed.
In addition, trading costs for continuously adjusting your portfolio to every bit of news would be very high at most brokerages, not to mention the potential tax implications of such short-term trading.
This isn’t to say that investors should ignore economic news. Turbulent markets can serve as a reminder to review your long-term plan and make sure that it’s still on track. That can make it easier to focus on long-term goals and strategies. A well-constructed, diversified portfolio takes into account your risk tolerance and goals. As such, it is specifically designed to go both up and down with the markets. The time to adjust your portfolio is when your goals or time frame changes, not when headlines change.