Five financial articles you should always ignore

Five financial articles you should always ignore

Quite simply, the best way to deal with the financial news media is to ignore them. This is easier said than done since the media is designed to provoke interest and build urgency. But interesting is not the same as important.

…interesting is not the same as important.

If one can not ignore the news, the next best thing is to learn to keep it all in perspective, especially when the next significant drop in the stock market occurs. The intensity and frequency of the coverage will grow substantially and spill over into more non-financial media, making it even harder to ignore.

We aim to help you become a more discriminating consumer of financial news by sharing common financial stories which truly are not worth your time.

The money manager profile

These puff pieces can be interesting because they can provide a view of what goes on behind closed doors. The problem here is the hasty generalization – making assumptions about an entire group based on a few bits of information. This is the classic error of making a judgment based on a sample size which is too small.

The headline may read, “XYZ’s Approach Bucks Conventional Wisdom.” In the story, a representative of XYZ will explain, “It is supposed to be hard to beat the markets, but we’ve stayed ahead of our peers for the last three years.”

Markets are hard to beat over the long haul, but three years isn’t the long haul. In such a short time frame, random chance would expect many groups would beat the market. The spokesperson’s suggestion is similar to saying, “A coin flip is supposed to be a 50/50 proposition, but I just flipped heads three times in a row, so I am clearly a skilled coin flipper.”

Because there is so much noise in performance numbers, each year writers will have a fresh set of managers to profile. You can ignore this because you don’t need to beat the market to succeed financially.

The market indicator piece

These stories are often built on the flawed logic that correlation indicates causation.

When events are clearly unrelated, it is easy to avoid this flawed logic. A child got his first bike as a present this morning and a man was injured in a car accident on I-4 today. The correlation between that child getting a bike and the accident is perfect. But clearly, there is no way the gift caused the crash.

When the items appear to have some relationship, avoiding this error is more difficult. Finance people love to study data and correlations. It is easy to confuse correlation with causation.

It is easy to confuse correlation with causation.

One of these making the rounds now is a purported connection between an inverted yield curve, recessions, and market declines.

Normally, you get more interest by tying your money up for longer periods, otherwise, the longer-term holdings wouldn’t be attractive. An inverted yield curve basically means that this normal dynamic is flipped or “inverted” such that short term rates are higher than longer term rates.

Most of the last few recessions have been preceded by an inverted yield curve and most recessions have had market declines of 20% or more associated with them, so as short-term rates rise, we see headlines like, “Watch Out For The Yield Curve,” that suggest we should be afraid of an inverted yield curve.

The problem is the facts don’t support the argument. If inverted yield curves caused market declines, then there should be a consistent pattern of market declines within a predictable period after the curve inverts. Further, the phenomenon should also occur in other countries with developed economies and markets. The hasty generalization is at play here too. The data set is too small. But even the limited data suggests no such patterns exist.

Of the 14 times since 1985 the yield curve inverted for two months or more in Germany, Japan, Australia, the U.K. or the U.S., the respective stock markets were up one year after the inversion 86% of the time. After three years, markets were up at about the same frequency as over three-year periods in which there was no inversion.[i]  That does not equate to a sign we should be fearful.

Sure, there may very well be a recession and a market drop the next time the curve inverts but moving money out of the market as though it were a sure thing can be costly. You can ignore these stories because there are simply no reliable indicators of short-term market movements and you don’t need to be a market timer to succeed financially.

The “If this happens, we are doomed” piece

This is the “slippery slope” misconception in action. Here, the suggestion is if we take a step on the slippery slope, we will inevitably slide toward some dire consequence.

The most common version says if some economic number comes in at some level, a recession and market drop will surely ensue. In recent years, this included tax code changes, election results, debt levels, and trade wars.

Slippery slope narratives rarely pan out as described. These articles can be ignored because economies and markets are far more complex than the narratives suggest and people adapt to changing circumstances.

The product profile

These are mostly found on blogs for product companies or sales outfits more than they are found on legitimate media, because the media doesn’t want to distribute sales pitches and often seeks contrasting viewpoints. The headline will be, “New innovation provides low risk way to reap rewards,” or simply, “How (insert product type) Work”

An example of a tool of the sales trade occurs when a salesperson sets up a situation so it appears there are only two choices. One is eliminated due to some adverse consequence, leaving only the option the salesperson wanted us to pick from the start.

A good sign this is present would be the use of the phrase “Either … or …”

“The more you pay in taxes, the worse off you are so either buy this product or pay Uncle Sam.” This is the pitch that is notorious for tricking high income people into lousy products. It plays on one’s distaste for paying taxes and asserts there are no other ways to manage the tax bill and the negatives of the product are minimal. A multi-faceted and coordinated approach to tax management is likely better.

Another common one is, “Either you avoid stock market drops or you slash your standard of living. Buy our product and you won’t suffer during the drop.”

Yeah, market drops aren’t fun but is “slash in your standard of living” the destined outcome of a market drop? No. Is there anything else that could be done other than buy the salesperson’s product? Most definitely yes. A simple tactic would be to diversify so you don’t put too much money in the market to start with.

You can ignore these because developing a coordinated financial plan provides a much better methodology to determining which products you should own than the false dichotomy of the either/or sales pitch.

The “analysts see the market moving…” piece

These pieces want us to believe an assertion to be true because many others say it is so.

This headline on MarketWatch on Sept 5, 2015 is a classic example, “100% risk of a 50% stock crash if Donald Trump wins nomination.”  The author cites several analysts to convey the feeling that everyone who is in the know agrees.

One source tells us, “Around the presidential election or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse.” Another says, “The world is at a crisis point the likes of which we’ve never really seen.”

Yet another even says it doesn’t matter who wins, “A mega crash is coming, dropping half off its peak, down below Dow 5,000. Not just another 1,000-point correction like last month. But a heart-stopping collapse coinciding with the 2016 elections … then a long systemic recession … probably lasting till the 2020 presidential election, maybe longer … no matter who’s in the White House, Donald Trump, Jeb Bush or Hillary Clinton.”

The author then adds his own commentary, “All the recent turmoil is but a prelude to a “Perfect Storm” dead ahead: The recent 1,000 point drop … slowing global economic growth… China’s market crash … a Fed rate hike … worst Dow volatility in 100 years … the slow death of the oil era … a long costly ISIS War … droughts … forest fires … irrational climate science denialism … and more.”

This example is on the extreme side of the ledger. Usually you don’t see the 100% number, the word “may” or “could” will appear, or no time frame is given to the prediction. Most ignorable articles follow a similar form. They use an attention-grabbing headline followed by arguments that stir emotions of doubt, uncertainty, fear, or sometimes greed. The hope is you’ll want to stay on top of things and come back for more.

You can ignore these because emotional decision making about near term issues is in direct conflict with being a prudent, long-term investor. Invest, don’t speculate.

…emotional decision making about near term issues is in direct conflict with being a prudent, long-term investor.

Don’t get sucked in. Ignore the financial press. If you can’t ignore it (and it will be hard to ignore when the next significant drop comes) learn to keep it in perspective. We’ll be here to help. That’s part of being a “Sanctuary from the noise®”

[i] Dimensional Fund Advisors