Investors need to keep their emotions in check

May 8, 2012 

I've been struck in the last few years by the emotional roller coaster that the financial media is imposing on individual investors. This continues today even though it is clear the economy is in a recovery mode, albeit at a moderate pace.

Barring an unforeseen natural disaster of great magnitude or a geo-political event that might cause a recession, it appears the U.S. economy and those of most of the emerging markets, countries around the world will continue to grow for the next year or so at least, and probably longer.

But each day in print, on the Internet, and especially on TV we see exaggerated descriptions of perfectly normal events and market fluctuations. One day a week or so ago the stock market declined about 1 percent or so. Mid-day, the Yahoo! Finance website's main headline read "Stocks Tumble."

One percent fluctuations up or down are a bit above average, but hardly a rare event, occurring dozens of times a year for the last 50 years or more. Does this type of normal market fluctuation deserve a description of "Stocks Tumble"? I would say not, and I think the media outlets do a disservice to investors by using descriptions which invoke fear or greed when it is obvious none is warranted.

Terms like "tumble" and "soar" should be reserved to unusually large

moves which are well above average, and even then used in moderation. Unnecessarily putting investors on edge, perhaps motivating them to make unwise decisions based on emotion is a disservice to the viewers and readers of these media outlets.

I understand their motivation. In efforts to sell advertising, they must prove a level of readership or viewership to entice advertisers to pay for exposure. With so many outlets competing with each other in today's market, this competition is fierce.

Unfortunately, I don't expect this competition to decline and sensationalism in financial markets reporting will probably only get worse.

So, it becomes incumbent on each of us, as individual investors, to shield ourselves from the emotions which may be created by exaggerated headlines, and to make sure we don't react in a way which harms our portfolio, when the best action may be no action at all.

Having an all-weather asset allocation plan is the best first step in accomplishing this goal. The one thing certain in our financial lives is that there is no certainty. Diversification and understanding an appropriate time horizon before investing in the more volatile asset types goes a long way in controlling the pace and timing of decisions, hopefully reducing the possibility of a snap judgment that we end up regretting.

Another valuable characteristic of successful investors is the ability to fight the urge to be part of the majority. Participating in the most successful trends usually ends badly if you stay at the party too long.

Tom Breiter, president of Breiter Capital Management, Inc., can be reached at 941-778-1900 or by e-mail at tom@breitercapital.com.

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