The danger of investing by headline
We’re once again seeing the geopolitical situation heating up – North Korea, U.K. elections, French elections, Trump’s trade threats, and so on. Is it time to sell stocks and switch to gold and bonds? How did that strategy work out last time?
Something media market pundits and prognosticators rarely do is revisit old predictions, especially those of the breathlessly hyperbolic kind. Two recent cases in point are the Brexit vote last June 23 and the election of Donald Trump as U.S. President last Nov. 8.
In the weeks and days leading up to these events, business media seemed to go into near-hysterics, with assorted deep thinkers predicting pretty much the end of the world as we know it – at least in financial terms. That had many investors selling stocks and buying so-called haven assets, like gold and bonds.
Well, one thing financial markets do really, really well is keep track of performance. Historical data are kept on every financial instrument for as far back as you care to go. And, now, thanks to the Internet, it’s free and widely available with a simple Google search.
So let’s go back to the Brexit vote last June. Last June, with predictions of imminent financial chaos coming from just about every media outlet, what did the stock market really do?
On June 23, 2016, the U.K. benchmark stock index, the FTSE 100, sat at 6,338. Given the dire warnings, you’d have expected it to spiral into the depths of a bear market. Today, a mere 10 months later, it’s around 7,275. That’s an increase of about 15%!
Brexit is now back in the news, of course, as U.K. Prime Minister Theresa May has called an election to confirm her mandate to implement the U.K.’s departure from the European Union. And we’re already starting to see the hyperbole ramp up again.
On Nov. 2, just a few days before the U.S. elections, gold was trading at $1,308 per ounce (in U.S. dollars). As the ultimate crisis hedge, you’d have expected the price to spike after all the gloomy predictions should Trump win. He did. And today, the price of gold is about $1,264 per ounce. That’s down 3% in the period.
How about bonds? Many Canadian investors, spooked by the drumbeat of ill omens, jumped into the iShares Canadian Universe Bond Index ETF when it was trading at $32. 12 last Nov. 2. Today, the ETF trades at $31.52 – down just 2% from the beginning of last November, as yields have stayed relatively flat.
And U.S. stocks? They too were widely predicted to crash in the “shock” of the post-Trump election period. You guessed it. Last Nov. 2, the S&P 500 Composite Index closed at 2,098. On April 25 it closed at 2,388 – up 14% from last November 2.
So basically, the exact reverse occurred of what most media “experts” were predicting. Sadly, this is all too often the case, as many investors succumb to what I believe is one of the cardinal sins of investing, the temptation to “invest by headline.”
With the geopolitical situation once again uncertain, investors may now once again be tempted to reallocate to “defensive” or “haven” assets. But that would be committing the cardinal portfolio sin of managing by headline.
In addition, by buying, selling, rebalancing, and reallocating, you’re not only generating costs in the form of brokerage commissions, but you may very well be inadvertently accumulating a hefty tax bill on the various buys and sells of your investments through the year. It all takes a sizeable chunk out of your investment returns and puts it in someone else’s pocket. There’s probably no other activity in the world where individuals will so eagerly perform a robbery on themselves.
It is far more prudent to approach your portfolio decisions from a perspective that looks at overall asset allocation, tax-efficiency, and cost. By this, I mean you should decide honestly about your level of risk tolerance. Then construct a diversified portfolio comprising safety, income, and growth assets in various proportions that reflect your risk comfort level. And stick with it. The key is to step back from the daily noise of the trading screen for long enough to take a look at your whole portfolio. And then ask yourself:
* Is it tax efficient? Am I attracting maximum tax with every transaction or am I minimizing the tax hit? Am I maximizing my use of Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans?
* Is it low cost? Am I using investment strategies that reduce my overall trading, transaction, and management costs, such as allocating at least some portion of my asset mix to low-cost exchange-traded funds?
* Am I mitigating risk? Am I diversifying my portfolio with enough non-correlated asset classes to suit my tolerance for risk? Am I using hedging or income-generating strategies with options? Or am I essentially “throwing darts” every day, and hoping for the best?
© 2017 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice. Securities mentioned are not guaranteed and carry risk of loss.