MoneyMonday - Beware the Media

Welcome to this workshop, Beware the Media, managing emotions in challenging times.  I’m Janel Cross.

Most of today’s workshop comes from a presentation called Media Replay produced by one of our investment partners, Hartford Funds.  So, let’s get started. 

Today’s headlines may seem scary—so scary that “playing it safe” may seem like the only rational  strategy. However,  most headlines aren’t exactly “new” news. 

In  the past few decades, we have seen repeating patterns of crises.  Let’s look at some headlines from the past…

How about this one, “Social Security’s coming crisis” from the Washington Post, September 1974?  Or  “No Way Out of This Unemployment Crunch” a March 1983 headliner from US News and World Report.  Or  Warning:  Further and maybe bigger federal bailouts ahead” from Time, December 1989.

Yet, despite all these crises, over time, the market continued to go up. 

Recognizing most “news” isn’t actually new is one thing.  But more important is recognizing how these headlines influence our behaviors.  Let’s talk about how these headlines drive our emotions, can cause us to make mistakes, and what we can do to keep emotions and mistakes at bay. 

The news is here, there, and everywhere.  Our 24/7 news cycle makes it easy to get caught up in the “Crisis Du Jour.”  And that negativity can fill us with worry and anxiety and change our outlook… for the worse. 

We are exposed to more news than ever before. In 2020,  more people got their news from smartphones than from TVs.  We basically have a media whirlwind in our pocket every minute of the day. 

This 24-hour news cycle provides an almost immediate  record of what’s happening throughout the world.  And, since we are basically a society of ambulance chasers, the more dramatic or  sensational, the more it sells. This constant onslaught of news makes it difficult to distinguish fact from fiction or to maintain perspective. 

The other downside of the easy-to-access 24/7 news cycle, is we are consuming more of these headlines than ever before.  A 2018 Nielsen  study revealed that we are watching over 30000  minutes of news a year.  That’s over 500 hours of headline consumption. 

And, while not all news is bad… given that negative news sells better, odds are you’re consuming more minutes of negative news than feel-good stories.  Let’s look at how the media informed us during the first months of the pandemic.  From January through July, 91% of US news headlines were negative.  Compared to 54% in the foreign press and 65% in scientific journals. 

But our pessimism as a nation seems to be more of a habit than a response.  From 2009 to the beginning of 2020, we experienced the longest bull market ever.3 But during most of that bull run, the majority of Americans believed our economic situation was negative.  It took 7 years for the majority to adopt a positive outlook. 

But maybe we can’t blame it all on newsmakers.  Evolutionary psychologists and neuroscientists argue humans seek out news of dramatic,  negative events. Experts say our brains evolved in a hunter-gatherer environment in which anything perceived as threatening had to be attended to immediately for survival.

Despite that gloomy  headlines leave us feeling stressed and worried, there appears  to be a strong correlation between negative market  performance and our curiosity about the news.

So far, we’ve established we are hard-wired to seek out the negative, and news outlets use that against us by publishing a disproportionate number of gloomy headlines.  And this makes us feel bad.  But it’s worse than that.  What we hear in the media can influence our thoughts and lead us to make costly mistakes that impact our financial future.

When investors are exposed to a steady stream of negative  news, they worry about their investments and losing money.  And that fear hangs on long after the crisis has passed. 

I know this is another busy chart but let’s walk through it.  This is a look back from 2007, before the financial crisis and the subsequent Great Recession, through the end of 2020. The value of the S&P 500, this blue mountain, grew to reach all-time record highs.  Remember, from 2009 to the beginning of 2020, we experienced the longest bull market ever.3 But while the S&P was doing its thing, the world. 

Continued offering up plenty of bad news like the Flash Crash when the Dow Jones index dropped almost 1,000 points in a single day. There were government shutdowns, the North Korean missile crisis, and interest rate hikes.  In spite of it all, the S&P marched on.

But, many investors were focused on playing it safe rather than growing their money.  And investors missed out. This red line represents the amount of money investors pulled out of stock investments. 

In fact, investors withdrew $2.3 Trillion dollars from stock mutual funds over this period.  But the S&P continued to offer up returns to those investors brave enough to stay their course.  From the end of the financial crisis, through the end of 2020, the S&P index value rose more than 600%. 

Most of the money investors pulled from stock funds went to bond funds which are generally less volatile.  But some took those dollars and put them in cash instead. 

But How “Safe” Is Cash?  Total assets in cash investments reached an astounding $15.8 trillion in 2020.10  While money in the bank gives us a sense of security when our interest earnings are measured against the rising costs of goods and services, in other words, inflation, can be less reassuring. In fact, after considering inflations, CD investors have been losing for the past five years.

The reality is, if you’re going to be an investor you also have to figure out how to avoid making mistakes.  That’s because markets go down more often than we’d like.  During a 40-year career and a 30-year retirement, you can expect to experience about 12 bear markets.  So the question isn’t whether or not you’ll face a bear market.  The question is how will you react?

Since 1960, we’ve had ten bear markets. 7 of the 10 saw drops of more than 30%.  Including the Vietnam War period when interest rates rose above 9%, the Middle East oil embargo and Watergate in the mid-70s, Black Monday in 1987 when the Dow fell 22% in one day, the 9/11 terror attacks, and the dot com bubble, the collapse of Worldcom and other corporate scandals, the financial crisis which introduced us to the concept of too big to fail, and of course most recently, the covid pandemic.

When the market drops,  the urge to panic can be intense.  But if you sell when the market is down, you lock in losses.  To make matters worse, many investors don’t find the courage to re-enter the market until things have improved or, put another way, markets have gone back up. 

Despite the recycled newsreel predicting a dire global catastrophe or the end of the investment world as we know it, financial markets have been resilient.  During these last 10 bear markets, a $10,000 investment in the S&P 500 would have grown to nearly $3.9 million.  A less aggressive, balanced investment would have grown over $2 million.  Even a low-risk bond investor would have grown to nearly $900 thousand. The investor who reacted and hit the panic button though lost out on a whole lot of opportunity.  And the investor who left their money “safe” in the bank missed out even more.

I’m going to step out of the Hartford presentation to talk about behavioral finance for a minute. 

Behavioral finance focuses on how individuals make decisions.  Classic finance and economics assume people always make rational choices based solely on optimizing outcomes.  But we know our emotions and psychology also influence our decisions.  Behavioral finance is the consideration of the ways they collectively influence us.

Our personal biases and beliefs heavily influence our predictions about the future.  For example, the theory of “loss aversion” suggests that people prefer avoiding losses to acquiring gains. Fear of loss causes us to overlook growth potential and makes us more likely to sell when the market is falling.  The same fear will probably have us sitting on the sideline when the market recovers.

Okay, let’s jump back into the Hartford presentation.  Since 1926, the S&P 500 Index has had 70 positive years indicated in green,  nearly three times the number of negative years.

Another bias worth mentioning here is “recency bias” which leads us to overemphasize recent experiences when making predictions about the future.  In other words, the COVID pandemic bear market, although very short-lived, seems like yesterday in our near-term memory which can make us more likely to forecast more bad markets.  

So, what can we do to keep our emotions at bay and avoid making mistakes? Well, I’d say start by going on a newsreel diet.  Unless you look for it, good news can be hard to find.  For example, odds are these headlines missed your radar together.

Future trends that could positively impact the economy include an Apple car, the focus of “Project Titan” which is staffed with over 1,000 employees working to develop an electric vehicle.  Or Amazon’s Prime Air which already received FAA approval with hopes of delivering packages to customers within 30 minutes.  Then there’s Google’s DeepMind which uses artificial intelligence to decode protein structures.  This technology has the potential to enable quicker drug discovery. 

Then there’s Bio Button a coin-sized disposable, wearable device to continuously monitor our health leading to faster diagnosis and treatment of illness. Finally,  there’s Elon Musk’s $100 million contest to develop carbon-capture machines to remove CO2 from our air and either bury it or convert it to something useful.

Next, get your investment portfolio off the “Media-Go-Round.” The repeating patterns of crisis reporting can make it easy to lose  sight of long-term goals. Sensational breaking news stories coupled with our innate uncertainty test our resolve.

Assess your stomach for investment risk independent of current events.  Work with an advisor or use online tools to build a diversified investment portfolio.  And then trust the strategy and avoid turning over the keys to the nightly news anchor, or worse, Patti Pessimist at the water cooler. 

And when tough times come, as they surely will, remember tough times don’t last but tough investors do.    While this sounds simple, that doesn’t mean it’s advice that’s easy to follow.  Try to remember

A bad trading day makes a good negative headline.  A few bad trading days make even better negative headlines.  But a bear market doesn’t set in until the market has dropped 20% or more. Stocks lose 36% on average in a bear market.1 By contrast, they gain 114% on average during a bull market.

Bear markets tend to be short-lived with an average length of about 9.6 months. That’s significantly shorter than the average bull market, which lasts about 2.7 years. Bear markets can be painful, but markets are positive most of the time. Of the last 92 years of market history, stocks have been on the rise 78% of the time.

Half of the S&P 500 Index’s strongest days in the last 20 years occurred during a bear market. Another 34% of the market’s best days took place in the first two months of a bull market—before it was clear that good times had returned.  The markets rally without warning and even Bear markets offer up opportunity.  That’s why we believe that the best way to weather a downturn could be to stay invested since it’s difficult to predict or even identify the market’s recovery.

As we wrap up, I’ll share one of my favorite quotes with you.  This one is from Michael Lewis, the author of The Big Short. "How many times does the world as we know it need to arrive before we realize that it’s not the end of the world as we know it?”

Never make an irreversible decision without talking to an advisor.  We can help you sort through what you see and hear in the news and  distinguish between valuable information and media noise.  We will remind you of the goals and long-term plans you have in place and remind you that they were built to weather good times and bad. 

Being worried and nervous is completely normal and, as you saw here, we are bombarded with things that exacerbate those concerns.  But we can help you stay focused on opportunity.  We can help you build risk-management strategies that give you peace of mind you’ll be able to weather the storm and reach your long-term goals too.

There are lots of resources in MoneyNav for this and many other financial topics.  But you can always meet with a coach too.  Schedule right from your MyMoneyNav dashboard or email yourfinancialcoach@moneynav.com

If you haven’t already done so, a great next step is to complete the MoneyNav assessment.  Your responses will be used to build a personalized set of best next steps or Money Moves to get you on track and moving forward.  Email yourfinancialcoach@moneynav.com for a link to your company’s assessment.