When Headlines Worry You, Bank on Investment Principles
Media outlets are in the business of enticing you to consume their content. Headlines are a primary way to get you to click and drive traffic. So rather than rummaging through your portfolio looking for trouble when headlines make you anxious, turn to your investment plan instead.
Hopefully, your plan is designed with your long-term goals in mind and based on principles you can stick with and your personal risk tolerances. While every investor’s plan is a bit different, ignoring headlines and focusing on the following time-tested principles may help you avoid making shortsighted missteps.
There are three principles to keep in mind when current events spike your anxiety:
1. Uncertainty is Unavoidable
Investing comes with risks. Uncertainty is part of the process and cannot be avoided. Recently, investors dealt with the Russian invasion of Ukraine, ongoing recession fears, potential bank failures, and inflation spiking. While there were plenty of reasons to panic, for the three years ending March 31, 2023, the Russell 3000 Index (a broad market capitalization-weighted index of public US companies) returned an annual 18.48%, outpacing its average annual returns of 11.69% since its inception in January 1979*. The past three years certainly make a case for weathering short-term ups and downs and sticking with your plan.
2. Market Timing is Futile
When headlines warn of impending doom, some investors attempt to “time the market” by adjusting their portfolio in response to the news. While it is tempting to think we can use short-term strategies to avoid losses, research shows this is ineffective. The impact of miscalculating your timing strategy can far outweigh any perceived benefits.
3. “Diversification is Your Buddy”
Nobel laureate Merton Miller famously used to say, “Diversification is your buddy.” Thanks to financial innovations over the last century in the form of mutual funds, and later ETFs, most investors can access broadly diversified investment strategies at very low costs. While not all risks—including a systemic risk such as an economic recession—can be diversified away (see Principle 1 above), diversification is still an incredibly effective tool for reducing many risks investors face. In particular, diversification can reduce the potential pain caused by the poor performance of a single company, industry, or country.
When the unexpected happens, many investors feel like they should be doing something with their portfolios. Often, headlines and pundits stoke these sentiments with more doom and gloom predictions. For the long-term investor, however, planning for what can happen is far more powerful than trying to predict what will happen.
*Source: Dimensional Fund Advisors. Returns are annualized as of March 31, 2023, and reflect monthly rebalancing.
McLean Asset Management Corporation (MAMC) is a SEC registered investment adviser. The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.
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