Any investor not upset by the paralysis in Washington probably
doesn't have a pulse. Both sides seem far more interested in
scoring political points than in resolving the current crisis.
I don't know how this will end, though I'm fairly optimistic
that we'll avoid breaching the debt ceiling -- if for no other
reason than that the consequences would be so horrible and
long-lasting. But I don't know for sure, and I'm not willing to bet
a penny either way on the outcome.
What I do know is that you would do well to pay little attention
to the news -- not just during the
current government shutdown
and debt-ceiling standoff, but all news events -- when making
investment decisions. It seems counter-intuitive, but investing
based on the news is one of the worst mistakes an individual
investor can make.
Here are four reasons why:
1. The market moves ahead of the news.
No bell went off on March 9, 2009, to mark the end of the
biggest stock market selloff since the Great Depression. Indeed,
the worst recession since the 1930s continued to deepen into the
Stocks typically move about six months ahead of the economy. How
can that be? The stock market reflects the current wisdom,
knowledge and hunches of all its investors. Academic studies have
consistently shown that the collective opinions of market
participants are usually remarkably accurate. That's why it's so
hard to beat the market, and why index funds beat most actively
That's also why the Conference Board's index of leading economic
indicators prominently includes the recent returns for Standard
& Poor's 500-stock index as one of its predictors of where the
economy is headed next. By the time you read dire -- or upbeat --
news, it's too late to buy or sell. The news is already reflected
in stock prices.
2. You're not in the loop.
Corporate executives and other insiders usually know a lot more
about how their business is doing than you can ever hope to know.
Savvy fund managers and good stock analysts do, too.
In the case of the impasse in Washington, the major brokerage
houses and institutional investors, including big mutual fund
firms, contract with ex-journalists, former congressional staffers
and former office holders to try to keep ahead of the curve on
Individual investors don't have anything but the Internet. This
is a game to leave to the professionals.
3. There's too much media hype.
You know how the weatherman is always predicting that an
approaching storm could trigger tornados? It keeps you tuned in.
The same thing, of course, happens with news stories.
As a longtime journalist, I know how hard mainstream reporters
try to tell each story honestly. But I also know how much pressure
there is -- with the rise of the Internet -- to publish pieces that
get tons of hits from Web surfers. That often means a minor
disagreement between two politicians ends up characterized as a
major brouhaha. And even mild economic weakness winds up portrayed
as a dangerous crisis.
4. You can't time the market.
Jumping in and out of the market based on the news requires
incredible luck to succeed. You might get it right once or twice,
but I know very few who have done it consistently enough to beat a
simple buy-and-hold strategy. And those few who have succeeded
don't do it based on the news; they use far more sophisticated
To time the market you have to make two decisions well: when to
buy and when to sell. A handful of economists and strategists told
investors to sell in mid 2007. But most of them were subsequently
years late in turning bullish, missing a gargantuan market
A Better Way to Invest
What should you do instead of investing based on the news? I'd
start by building a diversified portfolio. Even the youngest
investors need some bonds, and even the oldest need some stocks.
And you should own U.S. stocks and foreign stocks, as well as large
and small companies.
But you should tilt your portfolio toward the best values. Right
now, stocks look more attractive than bonds, given the puny yields
that bonds offer. Similarly, if you consider price-earnings ratios,
large-company stocks are cheaper, relative to history, than
small-company stocks. Foreign-company stocks boast lower P/Es than
U.S. stocks, and emerging-markets stocks are the cheapest of them
I know, I know. There are plenty of good reasons why foreign
stocks are cheap and emerging-markets stocks are even cheaper. But
reversion to the mean -- the tendency of prices and returns to move
back to their long-term averages -- is a powerful force in the
markets. You often just have to be patient enough to let it work
its magic. And this is an advantage you have over the pros. You can
afford to wait; they're under pressure to put up good numbers every
So diversify, and overweight what's on sale. By contrast,
investing based on the news is about as effective as chasing your
Steven T. Goldberg
is an investment adviser in the Washington, D.C., area.