For investors, the relentless streaming of media news about markets, business and economics can be overwhelming.
Investors are continually bombarded with headlines, charts and financial data over the internet and the press. Topics about U.S. stocks today are popular. All too often, media “news” evokes feelings of greed, fear and envy rather than reasoned thought.
Those whose investing relies primarily on headlines tend to ignore financial history to their peril. For example, in contrast to high recent performance of many featured stocks, the S&P 500 index—comprised of shares representing the most important U.S. companies — for ten years since 2009 – showed a cumulative return of only 0.9 percent, less than a single year’s return for a bank account!
Consumer confidence for business prospects here in the U. S. has risen to its highest level since 2000, when the infamous “Lost Decade” for U.S. stocks began. That is partly due to tax reform, leading many businesses to expand, and S&P 500 corporations to repatriate billions of dollars accumulated overseas. From January 2010 to May 2018, beginning at a low market point, the S&P 500 Index has grown 189.4 percent, leading other asset class alternatives.1
Recalling media headlines from the “Lost Decade”2 reminds us when even experienced market participants questioned the wisdom of disciplined equity investment strategies with U. S. stocks:
- May 1999: Dow Jones Industrial Average Closes Above 11,000 for the First Time
- March 2000: Nasdaq Stock Exchange Index Reaches an All-Time High of 5,048
- April 2000: In Less Than a Month, Nearly a Trillion Dollars of Stock Value Evaporates
- October 2002: Nasdaq Hits a Bear-Market Low of 1,114
- September 2005: Home Prices Post Record Gains
- September 2008: Lehman Files for Bankruptcy, Merrill Lynch Is Sold to Avoid Bankruptcy
Equity markets are inherently volatile as well as cyclical. While those times are well behind us, those crises continue to be important reminders of when headlines directly impacted investor feelings and decisions impacting wealth.
So how well did media headlines after the fact positively influence investor behavior by implying investors should go to cash? Sometimes, doing nothing is the right response, and the best way to avoid disaster.
For example, if one hypothetically held a diversified portfolio of large US stocks worth $10,000 back in May 1999 and stayed invested, that portfolio would be worth approximately $28,000 today, much better than a bond index fund or a bank savings account.3
When media noise focuses on high-performing stocks and funds, losing sight of psychological benefits for staying disciplined and abandoning sound strategy is all too common. Over the recent past, investors have been heavily influenced by media to concentrate in the well-performing top ten to 15 percent of larger U.S. stocks, like those found in an S&P 500 index—after they have already gone up in price and actually may be priced too high. Without a disciplined strategy, an equally strong temptation may be to start selling those same stocks low after media speculative noise has turned from optimism to pessimism.
Recently we see an increasing number of prospective clients wisely avoid expensive actively managed funds, and instead own low-cost index funds. But after professional analysis, X-raying their aggregate portfolios of index and index-style funds, we keep finding the same recurring issue: these personally repositioned portfolios are actually concentrated on a single asset class and a single market factor—closely approximating the U.S. larger company stock asset class, much like the S&P 500 index. International positions are underweighted, and size and value factors are absent. As for fixed income allocation to reduce volatility—those positions are often very underweighted.
Unknowingly, these investors have a diversity of funds but lack stock diversification and informed asset allocations for effective risk reduction, that would protect them in a market downturn and position them better for a recovery.
While no one has a crystal ball, looking beyond the headlines and adopting a long-term perspective can change how market volatility is viewed, and set more realistic expectations for sound investment strategy for successful long-term retirement planning.
THE VALUE OF A TRUSTED ADVISOR
Having a sound investment policy aligned with your ability to bear risk minimizes emotional responses when volatility hits and media once again, after the fact, blares a different trumpet.
A professional wealth management process combined with smart economic philosophy can lead to more confidence, more disciplined behavior, and fewer investing mistakes.
A Dimensional Fund Advisors survey found that those planning for retirement place a high value on the sense of security and peace of mind they receive from working with a professional advisor.
Busy people know they cannot do it all themselves, or lack the time and interest, and need time for other matters of importance. A knowledgeable and experienced specialist with expertise, perspective, and encouragement can more than pay his or her way.
Look for a professional wealth specialist who works with people like you, who can help you ignore the noise and stay focused, and so gain confidence and peace of mind with better outcomes.
The right professional relationship can make all the difference in your future retirement lifestyle, and position you to make a bigger impact with your family and community—and so finish strong.
For a short video, please see https://us.dimensional.com/tuning-out-the-noise.
Source: Dimensional Fund Advisors LP. All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to a certified wealth management professional prior to making any investment decision.
Investing involves risks including possible loss of principal. Stocks are subject to market fluctuation and other risks. Bonds are subject to increased risk of loss of principal during periods of rising interest rates and other risks. There is no assurance that any investment strategy will be successful. Diversification does not assure a profit or protect against loss.
There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
- 1For the US stock market, this is generally understood as the period inclusive of 1999 – 2009.
- 2OECD (2018), Consumer confidence index (CCI) (indicator). doi: 10.1787/46434d78-en (Accessed on 22 June 2018)
- 3As measured by the S&P 500 Index, May 1999–March 2018. A hypothetical dollar invested on May 1, 1999, and tracking the S&P 500 Index, would have grown to $2.84 on March 31, 2018. However, performance of a hypothetical investment does not reflect transaction costs, taxes, or returns that any investor actually attained and may not reflect the true costs, including management fees, of an actual portfolio. Changes in any assumption may have a material impact on the hypothetical returns presented. It is not possible to invest directly in an index. To put the S&P 500 index return in perspective, the Bloomberg Barclays US Aggregate Bond Index would have grown to $2.40 for the same period with only 23 percent of the market volatility (measured by annualized standard deviation). With interest rates at historic lows today, however, looking forward the next twenty years, bond indexes cannot deliver a comparable performance.