The Signals & Media Noise: Part 1
By Michael McKeown, CFA, CPA - Chief Investment Officer
Financial media appeal to our emotions. That translates into clicks from readers. More clicks means more money.
There is an entire field of study dedicated to emotion and money. It is called behavioral finance.
The foundation of economics used to be “rational man.” That is, always and everywhere, people make rational decisions.
Behavioral finance thoroughly debunked this.
Loss aversion is a common bias. Nobel Prize winner Daniel Kahneman performed an experiment to demonstrate. The experiment involved asking people if they would accept a bet based on the flip of a coin. If the coin came up tails the person would lose $100, and if it came up heads they would win $200. The experiment showed that, on average, people needed the opportunity to gain about twice as much as they were willing to lose in order to proceed with the bet.
This proved that the pain of a loss outweighs the euphoria of a gain of the same amount.
As portfolios grow, decisions become more difficult. Loss aversion increases as the stakes of an investor’s choice becomes larger.
Following market recoveries, the media talk about how much money investors are making. People have the ‘”fear of missing out.” After market volatility, the stories of turmoil and crisis grab headlines. People have the fear of losing.
It is much more noise than signal.
Everyone is susceptible to the biases studied by behavioral finance. Even financial professionals.
The Investors Intelligence Survey asks advisors if they are bullish (positive) or bearish (negative) on the market each week. Usually, bulls outnumber bears. The rare instances where bears outnumber bulls tend to be much closer to the bottom of the market than the top. Note the trough in the S&P 500 Index with the vertical grey bars in the years of 2011, 2015-2016, and 2020.
Who wants to read the following headline? “Diversified portfolio helps retiree reach spending needs.” That is so boring.
It does not appeal to emotion.
There are plenty of stories in the headlines today – inflation, cryptocurrency, volatility. These appeal to fear and greed, the emotions that get more clicks.
It is far better for investors to block out the noise, focusing on the signals that lead to long-term success.
In Part 2 of this series next week, we will dive into the signals investors can use across investments.
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Marcum Wealth, or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Marcum Wealth. Please remember to contact Marcum Wealth, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Marcum Wealth is neither a law Firm, nor a certified public accounting Firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the Marcum Wealth’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request. Please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Marcum account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Marcum accounts; and, (3) a description of each comparative benchmark/index is available upon request.