Surging and Tumbling – The Media’s Stock Market Rollercoaster

It has been fun observing the media’s search this week for ever more extreme language to describe the movements in global stock markets.

Take a look at these two headlines which have come to my attention from the same source (The Telegraph) over the past 24 hours…

28/01/2016 – FTSE 100 tumbles as Osborne pulls Lloyds share sale and oil surges

29/01/2016 FTSE 100 surges as Bank of Japan stuns with negative interest rate move

Now let us take a look at what the impact to FTSE 100 investors has been over this period.  The FTSE 100 closed at 5,966.42 on the 27th and subsequently closed at 5,927.10 on the 28th, a fall of 0.66% on the day which isn’t great news, but forgive me for not running to the hills in panic just yet.  As I write this, the FTSE 100 has just recovered through the 6,000 barrier or up around 1.2% so far today.

So despite the ‘nosedive’ on the 28th, investors are already back in positive territory.  For those savvy news avoiders amongst us, all of this will have passed without incident, but I do worry about the impact this sort of coverage has on investor behaviour.

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Watching the excellent documentary series the Brain last night, one of the academics explained how people’s memories of car speeds can be altered by the language used in questioning.  How fast were the cars travelling when they ‘smashed’ into each other will illicit a different recollection to a more restrained selection of language to describe the impact.  It got me wondering how the language used in this kind of story affects investor behaviour in those who read or listen to it.  In some ways this is all rather self prophecying.  Markets are moved in the short term by human emotional behaviour which must be influenced by hysterical coverage such as this.

So if you are not ready to switch the radio channel for the markets update or throw away the money section just yet then please just take a moment to read some points which may provide a tonic.

  • It is very unlikely that you are solely invested in the FTSE 100, NIKKEI, S&P 500 or whatever index being quoted.  Most sensibly run portfolios have a mix of diversified asset classes which act to smooth out these bumps along the way.
  • Remember you’ve invested for the long term.  Day to day stocks go up and down.  This is a good thing.  Without this risk there can be no additional return which presumably is why you invested in stocks in the first place!
  • The quoted index figure will likely not include the value of the income produced by the stocks within it.  At present the FTSE 100 is yielding 3.98% per year on top of any growth in the numbers you may hear quoted.
  • By the time you hear the news about the daily fluctuations in your stocks, there is nothing you can do about it.  Stocks are priced on a forward looking basis and there is no one out there who can predict the right time to get in and out of the market with any level of long term consistency.

So if you’re checking your portfolio every day you are going to go through a rollercoaster of ‘surging and tumbling’ emotions which all sounds pretty exhausting to me.  Stock market linked investments should have an investment horizon of ten years or longer where possible, checking how they’ve done over a similar time horizon is likely to lead to whole load less worry.

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Did you know that as investors we are one of the biggest threats to our own wealth? Allowing this sort of noise to influence our behaviour can be catastrophic to our long term investments and pensions and by default our financial plan.

This is why we love talking about behavioural risk with our clients. It is one of the most important aspects of our role as Personal Finance Directors to protect our client’s financial plans through education, coaching and reassurance.

If you would like to learn how we do it, why not get in touch?

matt@bdbfinancial.com

 

 

Posted by:
BDB Financial

Published:
January 29th, 2016

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