4 reasons to ignore market warnings when investing

Market warnings actually create worse outcomes. And the finance media’s continuous warning system creates an atmosphere of anxiety that we breathe in every day. (Sponsored.)

The Mindful Money team. Photo: Karolina Zapolska

This story was written and paid for by Mindful Money, a Berkeley wealth management company that is committed to a behavioral and mindful approach towards financial wellbeing.

Market warnings are worse than worthless.

When something is “worthless,” it’s simply not helpful…it doesn’t improve outcomes. When I say market warnings are “worse than worthless,” I mean they are worse than not helpful. They actually do damage… they create worse outcomes.

The media’s continuous warning system creates an atmosphere of anxiety that we breathe in every day. It’s bad for us. It’s bad for our health, bad for our finances, bad for relationships, and bad for our long-term success.

Here are four reasons why you shouldn’t listen to market warnings…I’m certain this list isn’t exclusive, I’d be happy to hear of others if you think of more.

1 —NO ONE can predict the future

It probably goes without saying that you can ignore the financial equivalent of Monday morning quarterbacks. There are always people questioning the last Fed statement or industry statistic. While many of these are interesting (read: entertaining)…they aren’t useful in any reliable or even consistent way.

You might think that the most well-educated folks regarding market and economic cycles – Ph.D. economists – would be better. Not so much. Even well-regarded economists get it wrong. In 2007 just before the Great Recession, as President of the U.S. Federal Reserve, Ben Bernanke said:

“…we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

In 2014, a survey of economists predicted oil prices, inflation, unemployment, and interest rates would rise. They were wrong in every case.

Amelia Thomson-DeVeaux, writing in fivethirtyeight.com, references a 2018 study conducted by An, Jalles, and Loungani that considered 153 recessions across 63 countries between 1992 and 2014 and determined that the vast majority of economists across both the public and the private sector just missed them.

And, absolutely no one predicted the virus, the pandemic spread, the economic damage, or the market recovery. Is it even possible to predict such big events?

One of the greatest economists ever, John Kenneth Galbraith, said: “The only function of economic forecasting is to make astrology look respectable.”

That sounds about right.

2 — Emotional investing is bad for your health and your wealth

Nothing good ever comes from emotional investing. Yet, that’s exactly what you do when you make investing decisions based on ever-changing headlines and warnings from the financial punditry.

When you make re-active decisions, you’re always worried about whether you made the right move. How’s the decision performing now? Did I make the right choice? These questions stick in your mind everywhere you go. Then you see more headlines, experience new emotions and make another decision…and another…and another. Each decision stacks in your mind along with another set of second-guessable outcomes and another rung of anxiety. It affects your health, relationships, and job performance.

And, it also does damage to your wallet. Have you ever thought about the fees that come with constantly tweaking your portfolio – or worse – darting in and out of the market? If you trade a lot and haven’t considered this, you should know that you are the type of investor that makes brokerage firms profitable.

You may pay an actual trading charge (or commission), though Schwab, TD Ameritrade & Fidelity have all eliminated some of these recently. These range from $4.95 to $20 whenever you buy and sell a stock. But even if you don’t pay a fee, there is always a cost – the order can be sold for pooled trading, there is always spread between the bid and the ask.

If you buy a stock at $20, it wasn’t listed at $20.

A stock is always listed with a price range – people who want to sell will “ask” for $20; people who want to buy are looking to “bid” $19.50. It doesn’t matter how wide or narrow the spread is… when you buy you are paying the higher price; when you sell you are receiving the lower price.

If markets are efficient and unpredictable, then this combination of costs (especially when repeated often) becomes a real drag on your long-term performance.

Then, you still have to account for taxes. You pay ordinary income tax on stocks held less than one year. And, you pay capital gains taxes on anything held over a year. In most situations, your ordinary income tax rate is higher than the capital gains rate.

3 — The odds aren’t in your favor

The average investor underperforms the market as a whole almost every time. According to Dalbar, in 2018 alone, the average equity investor lost 9.42%, even though the market (measured by the S&P 500) only lost 4.38%.

Through Dec. 31, 2019, we see that the S&P 500 had a 20 year average return of 6.02%. But, the average investor’s return was only 4.25% (a –1.77% annual difference!). However, if you compare the average Equity Fund Investor to a Global Equity Index Portfolio, which returned 8.03%, we begin to see the real difference (a -3.78% annual difference).

How does this happen? If all we had to do was buy the market and hold it to get those returns, why don’t we get those returns? Because we don’t buy the market and hold it. Instead, the average investor sells when things go down and they are afraid and buys when things go up and they are excited. It is the repetition of this process that creates the big long-term difference.

Believing you can beat these odds is believing you can predict the future and accurately buy low and sell high. As we’ve already established, even super-smart economists struggle with this.   

4 — It’s not enough to be right once; you have to be right twice

Think about this. You have to be right twice when you listen to market warnings. You have to correctly buy at the right time (when a stock is at its lowest), and you have to correctly sell at the right time (when a stock is at its highest). And then…if getting it right those two times hasn’t led you right up to all of your financial goals being realized, then you have to do it again…and again…and again!

All the while, human intuition (cognitive and emotional bias) tells us to pile into things when they’re exciting and run from them when they’re scary. To successfully time the market, you often have to do the exact opposite of what you really want to do. You have to miraculously buy when things are at their scariest and sell when things are at their most exciting. Do you think you can do that? Consistently?

Or, might there be a better way? A more mindful way?

What to do instead of listening to market warnings

The most important thing you can do about market warnings is try to ignore them. Remember market warnings are worse than worthless. Every day we get more and more anxious about things we have no control over and – most importantly – things that have no bearing on our long-term personal financial outcomes.

Instead, you need to seek a practical financial education (you need to learn how markets and economies work); have a plan that informs how much you need to save; and a process that determines how you invest.

When these are in place and you believe in them, you can ignore the headlines and the fear. When you have a goal-focused and planning-driven process you trust, you will have a less anxious life. And by sticking to your saving & investing plan you will have better financial outcomes as well.

Jonathan DeYoe, President and Founder of Mindful Money. Photo: Courtesy Karolina Zapolska

Jonathan K. DeYoe is President of DeYoe Wealth Management, Inc dba Mindful Money, a Registered Investment Advisor.  He is the author Mindful Money: Simple Practices for Reaching Your Financial Goals and Increasing Your Happiness Dividend. 

You can follow Jonathan at mindful.money; on YouTube; on LinkedIn; on Facebook; on Instagram; and on Twitter.

This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where DeYoe Wealth Management, Inc. dba Mindful Money and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by DeYoe Wealth Management, Inc. dba Mindful Money unless a client service agreement is in place. Mindful Money is a service mark of DeYoe Wealth Management, Inc. a Registered Investment Adviser.