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The issue with impulse investing

Don’t let short-term noise ruin your long-term savings goals.

JOHANNESBURG – Ever wondered why a leading newspaper carries a particular story on the front page and not elsewhere?

Theoretically at least, the decision is related to what media thinkers call “news values” – the factors that determine the newsworthiness of a story. The expression “if it bleeds it leads”, comes to mind.

Essentially it means that a story about the president resigning will be considered to have more impact, prominence and proximity than a story about a car accident in Johannesburg (which is deemed a “common” event).

In the world of investment news, it means that a hypothetical story about the JSE All Share Index falling 10% would have prominence over a report on an AltX listed company expanding into Africa.

But while the decisions around the prominence of articles are taken on the same basis, I would argue that – in most cases – there is one considerable difference between mainstream news and investment news.

For the most part, a news article on crime or political issues won’t have any immediate (and possibly lasting) impact on the reader’s finances. He or she would read the latest report about new cabinet appointments or a recent crime and go about the day as if nothing has happened. If nothing in the report suggests that the reader would personally be affected by the event, the article would soon be forgotten.

But an investment news article about equity market losses, a board shake-up or an interest rate hike could have an immediate impact on the reader’s pocket and result in an urge to make rash investment decisions – even in cases where this might not be in the reader’s best long-term interest.

The social media news cycle

The challenge long-term investors face today, is that the news cycle has got considerably shorter. Whereas your newspaper was previously delivered to your door once a day and you may have had to wait for the radio market update after 17:00 to get your daily share prices, nowadays news is readily available – often within seconds of the event occurring.

Even if you are not “plugged in” and may be ignoring social platforms like Facebook or Twitter, chances are that the news will reach you even if you are trying to ignore it.

For investors this means that you will be bombarded with share price movements, interest rate announcements, company news and forecasts within seconds of the news breaking.

It takes a rational, focused and informed approach to be able to see investment news for what it is. News about what is happening at the moment/this month/this year.

Will the bourse dropping 2% today really have an impact on your 10-year investment? Does the fact that markets are at all time highs really mean that you should have a 100% of your assets in cash?

The shortening of the news cycle and the rising prominence of social media undoubtedly mean that investors will be confronted with investment news and data more often than they were ten or twenty years ago.

It also means that they would need to resist the urge to act on short-term investment news more regularly than was previously the case.

It means that investors will likely have to overcome the impulse to act hastily more often when share prices start falling, CEOs step down and interest rates are hiked.

News changes and it can change fast. Like one investment strategist told me in an interview in February this year: “Before November last year, the question was whether the price of Brent crude oil could decline and stay below $70 a barrel, now the question is whether it can go up and stay above $70!”

Trying to make investment decisions when the environment is this volatile is incredibly tough. Making an investment call based on the short-term movement of the oil price, is arguably the same as gambling.

Of course, every situation and investment case will need to be evaluated on its own set of facts.

For the investor two months away from retirement and with a significant exposure to shares, a 20% fall in the market could wipe out a considerable part of his retirement savings.

At a recent investment presentation an analyst recalled how some executives who were on the brink of retirement decided to move all their retirement savings offshore (this was before Regulation 28 restricted such movement) at a time when the rand was very weak. The rand strengthened considerably and one executive had to retire on around half the money he had accumulated as a result of currency appreciation.

Getting to the music

What am I trying to say? That you should stop checking share prices on a daily basis? That you should change your preferred home page to a holiday destination website instead of Moneyweb? Or that you should never let news articles influence your investment decisions?

No.

What I am trying to say is this: Sit down (with your financial advisor) and consider your long-term investment goals carefully. It may be providing for your kids’ education, it may be a comfortable retirement, it may even be an overseas holiday. Also consider what investments are most likely to get you to your goals.

And every time you are confronted with investment news, before you even think about making any changes to your portfolio (or phoning your broker or investment advisor), ask yourself this question: Does this event really have an impact on my long-term investment decisions?

In the vast majority of cases, I don’t believe short-term events should dictate long-term investment choices.

Yet, sticking to your investment strategy when every investment news outlet and social media outlet is quoting “experts” saying a market correction is on its way is tough.

It requires a rational, considered approach and the willingness to override urges to act hastily.

I am a news junkie and I spend considerable hours reading investment articles. It’s interesting, sometimes thought provoking and often even entertaining.

But ultimately, it’s news – a factual consideration of what the media considers timely, prominent, impactful, in close proximity and even strange.

It requires careful consideration and insight to really separate the music from the noise.

Think carefully before you wager your long-term goals on short-term investment news stories. For the most part, these are aimed at informing, educating and entertaining the masses.

Not at carefully constructing an investment portfolio based on your specific long-term goals.

* This article is the opinion of the journalist and should not be considered advice.

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