Last week I wrote a bit about how many unethical financial advisers make extensive use of pressure sales tactics. Political news items are some of the best tools such advisers have in their kit. Political news has high emotional content for most individual investors, so it’s highly useful as a manipulation tool.
The standard model for a big-box financial adviser is to follow the following game plan:
- Call you up to tell you about Political News Item X from this week’s headlines
- Suggest a “hedging” or “downside protection” scheme to actively defend your portfolio against this news item
- Execute a set of trades (and receive commissions on those trades) to implement this strategy
- Repeat again next quarter with a new random news item that sounds scary
Avoid Churn by Gaining Perspective on the Relevance of Political News
So how do we resist the urge to constantly steer the boat? It helps to review a year’s worth of news with the benefit of hindsight. Let’s take a look at which 2018 financial news items actually seemed to have a real impact on your financial future. This of course assumes you are not retired yet and have the benefit of another few market cycles before your investments start to be fully consumed.
Two Financial News Items that Actually Impacted Your Portfolio
Series of Facebook Privacy Mishaps
I don’t think this will prove to have a lasting impact on the market, but Facebook is a very large company. The market value of Facebook is high enough that a big revaluation is enough to actually matter for portfolios. I’d say this one is still “TBD” for the long-term effect but for now I’ll mark it a “Yes”.
President Trump’s Escalating Trade War with China
This didn’t seem to matter at first, which was a little surprising. But in the second half of 2018 investors seemed to start to think that maybe it’s a bad idea for the two most important global economies to be continuously chucking tariff grenades at each other.
And Which Financial News Items Seemed to Matter at the Time, but Didn’t?
- President Trump pulling out of the Iran nuclear arms deal
- Steel tariffs on EU, Canada, Mexico
- Net neutrality laws expiring
- Any of the US-North Korea summits
- Apple becoming the first company worth $1 trillion
- The assassination of Jamal Khashoggi
- Brexit moving forward
- Rising interest rates (maybe?)
- The U.S. government shutting down (still TBD but nothing yet, right?)
- Midterm election results
- Brett Kavanaugh hearings and confirmation
- Bitcoin valuation volatility
Look at all these articles about the supposed market impact of such-and-such minor news item!
MarketWatch: Three winners, three losers in net neutrality ruling
CNN: Stocks sink after Trump cancels North Korea summit
CNBC: There’s now a real chance the UK won’t get a Brexit deal — here’s what that means for markets
Honestly, what is the point of reading all these articles? If you’re interested in economic and/or political news, fine! But don’t think that anything in there is going to help you invest your money.
You’ll notice that my Friday digest of weekly financial articles from other sources rarely includes any time-sensitive information. I like sharing articles that have information that is useful in a lot of different market environments, and not articles that are only relevant today. In fact, if we are on a consultation call, and you ask me something like, “What did the S&P 500 do today?”, I’ll probably say I don’t know. Same for “Why do you think the retail sector did so well this week?”. These little day-to-day and week-to-week variations in the markets don’t matter to me, and they shouldn’t matter to you unless you trade equities for an investment bank professionally.
So what? How Does This Impact My Portfolio Strategy?
Obviously these are all debatable and it’s hard to ascribe a market impact to each item. In particular I think the interest rate hikes should matter but it’s hard to see a direct effect on asset prices linked to the rate hike timing.
But my overall point is this. The long-term performance of your savings is largely determined by global structural factors and demographics. Regardless of what the President tweets, populations are going to grow, people are going to work and buy things, and trade is going to flow. Keep that in mind, and realize that most of the time, the correct “hedge” or “protection strategy” is to leave your portfolio alone and let time work its magic.