Will You Fall Prey to “Headline Risk”?

by Alexander Green, Investment U Chief Wealth Strategist
Friday, September 2, 2011: Issue #1592

In the last couple of months, millions of investors have done a 180. It happens all the time. And – just as in the past – they will surely come to regret it.

The story is as old as equities themselves. When the market is an uptrend, investors focus on opportunity and considerations of risk go out the window. When the market is in the tank, they focus on risk and forget about opportunity.

This is the very opposite of what you should be doing.

During my 16-year career as an investment advisor and portfolio manager, I used to show new clients a 200-year chart of the stock market and ask them to identify the best buying opportunities.

Invariably, they pointed to the periods when the market had cratered.

I asked if they would be willing to step up and take advantage of such opportunities in the future. Most nodded vigorously and assured me that they would.

Few actually did.

Why? Because you can never imagine the news backdrop that will accompany a major stock market decline.

When the market recovered – as it always does – these same investors kick themselves for not scooping up bargains when stocks were cheap. Yet when the market declined again, they would generally react the very same way.

Nothing could be simpler than to say, “buy low, sell high.” But pulling the trigger when times are tough isn’t easy.

How to Avoid Headline Risk

It’s easy to fall prey to “Headline Risk.” Here’s what I mean…

On August 9, national newspaper and television headlines shouted that the Dow had plunged 634 points the previous day. That was not an insubstantial drop. It amounted to a 5.5 percent decline in the index.

Yet few sources reminded investors that the Dow was still up 66 percent (excluding dividends) from the market lows 2 ½ years ago. Or that the drop wasn’t even in the top 50 for largest daily percentage losses.

Similarly, the media made a big deal about the market sell-off the week of August 1 to 5 representing an evaporation of more than $4 trillion in world equity values. That’s a big number. (Unless you’re a Congressman, apparently.) Yet the total value of all stocks worldwide is approximately $55 trillion. And, for the overwhelming majority of investors, these were temporary paper losses.

Where was the context? There wasn’t any. The media needs sensationalism to grab viewers’ attention. Newspapers, magazines and television shows aren’t interested in helping you reach your financial goals. They’re interested in helping their marketing departments sell advertising. Sensationalism does just that.

Understand this and you can inoculate yourself against “Headline Risk.” Scary headlines create strong emotions. But strong emotions are usually the prelude to bad investment decisions.

Flee common stocks – the greatest wealth creator of all time – and where will you go? Into 10-year Treasuries yielding 2 percent? Into money market accounts paying next to nothing? Into gold which has already risen six-fold in the past 10 years? Into residential real estate which is mired in a sea of foreclosures?

High quality stocks are still your best bet to meet your long-term financial goals. National headlines are screaming just the opposite, of course, just as they have during every major buying opportunity of the past 75 years.

The truth is your greatest risk is not market fluctuations. It’s that your money fails to keep up with inflation – or that your investment portfolio kicks the bucket before you do.

Consider that before extravagant headlines prompt you to do something foolish.

Good investing,

Alexander Green

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