Two unfamiliar, yet common, investment mistakes

The Ritcey Report

September 7, 2017

The insidious impact of political and media ‘noise’ on investment decisions.

Google ‘Top 10 investment mistakes’ or some variation of that phrase and you’ll come up with dozens of opinion pieces telling you exactly what they are. There will be significant overlap in many of the views expressed – not having clear investment goals, being insufficiently diversified, focusing on short term performance, being just three of them – but many will overlook two of the most insidious enemies all investors face: the impact of political and media ‘noise’ on investment decisions.

A recent bulletin from the CFA Institute, written by Robert Stammers, CFA, Director, Investor Education, offered a compendium of Tips for avoiding the top 20 common investment mistakes. It’s an excellent shortlist and I recommend it to you. Buried in the bulletin was the following gem: ‘But looking past near-term chatter to the factors that drive long-term performance is a worthy undertaking.’

Ignore chatter

I italicized the word chatter in the last paragraph for very good reasons. To call the media noise surrounding investing and investments distracting is an understatement. The Ritcey Team spend a great deal of time selecting actionable information out of a wide range of publicly available comment and prognosis.

But we also scrupulously assess its validity against our own proprietary research, analysis and seasoned judgment. The trouble with ‘the news’ is that by the time it goes public, the information it conveys has all too often been built into market pricing.

Some examples

Let me give you some examples of what can happen. The United States’ stock market stumbled recently on a report that President Trump tried to terminate an F.B.I. investigation of his former national security adviser’s alleged collusion with Russian authorities, with the Dow Jones industrials falling 373 points in one day.

In France, investors were overjoyed that Emmanuel Macron beat the far-right National Front leader, Marine Le Pen. An upset Le Pen victory would very likely have made the market reaction to Britain’s decision to leave the European Union last summer look tame. And, of course, the so-called Brexit vote sent European stocks down 7% the day after the surprise outcome.

Consider what actually happened. The Standard & Poor’s 500-stock index recovered virtually everything it lost after the Trump-Russia news broke, and it closed at a new high.

Within a month of Brexit, European stocks had recovered nearly all their losses. This year European stock markets have been notching new highs.

Tune out political events

‘Investors should tune out political events,” observed James B. Stack, president of InvesTech Research and Stack Financial Management, who has done a study of what he calls ‘crisis events’ and their effect on markets.
The problem, Mr. Stack’s research has found, is that ‘geopolitical events may be widely feared, and there will often be a knee-jerk market reaction when they’re unexpected, but seldom do they have a lasting impact. Underlying economic trends and monetary policy are far more important.’

Never second-guess a robust strategy

As a wealth manager with a long time horizon I try not to be distracted by political and media ‘noise’ and I strongly advise my clients to follow the same path. Second guessing a robust strategy can lead to short-term – and potentially disastrous – portfolio modifications.

The financial media are especially culpable in stirring up trouble. Trouble sells newspapers and builds TV audience ratings, but the damage the influence of transient, sensationalist commentary can do to long-term investment performance is incalculable.

Some concluding examples

Remember the showdown over the federal debt ceiling in 2011, when Standard & Poor’s downgraded United States government securities for the first time amid fears the government might default on its debt?

‘Stocks dropped 15% in less than two months and we were on the brink of a bear market,’ Mr. Stack said. ‘Once the crisis was resolved, stocks came roaring back,’ and had regained all their losses by year-end.

Of 11 major geopolitical events examined by Mr. Stack’s firm, only two – the Nazi invasion of France in May 1940, and Japan’s bombing of Pearl Harbor in December 1941 – led to market losses over one-week, three-month and one-year periods (and in the case of Pearl Harbor, the one-year decline was less than 1%).

According to Mr. Stack, President John F. Kennedy’s assassination had no discernible impact: stocks were up more than 20% a year later.

Dave Ritcey, The Ritcey Team, Scotia Wealth Management