If you’re anything like me, you will have been spending a lot of time reading over the summer. As I waited for the cyclones to roll through in January, I was devouring all the reading material I could get my hands on; books, magazines, newspapers etc.
While reading the newspapers, I noticed an overwhelming predominance of bad news stories. This is due to what psychologists call “negativity bias” – in other words the natural human reaction to prioritise and remember bad news. The theory goes that we have evolved to react quickly to potential threats, so bad news could be a signal that we need to change our behaviour quickly.
Headline writers and newspaper editors around the world know this and take advantage of it. In the highly competitive world of online media where every “click” matters, the effort to attract eyeballs leads to this overweight of negatively-worded headlines and stories. This leads to more time being spent by the reader on the bad news stories and the algorithms behind the newspaper sites and social media sites will continue to serve up these negative stories to satisfy our insatiable appetite for such news.
The financial media is no different. Late last year, most stories in the financial press revolved around uncontrollable inflation, rising interest rates and the cost of living crisis. These stories are still around, but they have been joined recently by a focus on the possibility of a forthcoming recession and earnings downgrades.
All the above are causes for concern, but sometimes it is worth standing back and taking a broader view before taking action. One should read as much as possible and take in differing opinions, but the trick is knowing when (and, more importantly, when not) to act on this news flow.
I suspect reports of a possible recession will continue to dominate the news over the coming months and they will hit a peak when/if an actual recession is declared (as defined by two successive quarters of negative GDP growth). The negative headlines around this will doubtless worry many investors and potentially lead some to re-allocate assets from risk assets, such as shares, into more safe areas such as cash.
Whether or not this is the right thing to do remains to be seen, however, many experienced professional investors will likely be looking forward to the recovery phase and will be busy identifying opportunities to benefit from this. Financial markets are forward looking and often trade on predictions for future developments rather than what the economy is experiencing at the present time. Therefore, as an investor, it is important to maintain a balanced view and not focus too much on headlines that are designed to evoke a response.
Avoiding a knee-jerk reaction to negative news
History shows that sticking to a strategy and not chopping and changing in reaction to bad news stories provides a much better outcome for investors.
The important factors are to have clear objectives for your investments and a clear idea of your risk tolerance and time horizon. These factors will allow you to focus on creating the correct asset allocation for your circumstances rather than being influenced by short-term movements and negative headlines.
If you need assistance with this, Milford has various online tools available.
If you have more than $500k to invest then we have Financial Advisers available for consultation and advice.