If you thumbed through a newspaper in December 1999, you would likely find a story about the impending chaos that would be caused by the Y2K phenomenon.
Much of the media reported that Y2K would cause significant financial and economic hardship, and people made investment decisions on this basis.
Of course, we know that when the clocks and the computers ticked over to 1 January 2000, nothing much happened. Whether that was because it was never an issue, or because the issue was identified and rectified, the relevance for investors is to focus investment decisions on long-term goals and research, and not the hyperbole of news items.
Indeed, the Covid-19 pandemic is all the proof we need that we can’t always predict world-changing events that cause large shifts in financial markets. But when it comes to investments, some investors still follow the media closely to determine future performance.
Yet relying on news channels to make sense of investments may not be the best way to generate positive returns. Let’s look at why this is.
A desire to “take control” can drive investment decisions
Trying to bring some semblance of order to a chaotic situation is natural, which is why media predictions and reports often coincide with global uncertainty. Russia’s invasion of Ukraine on 24 February 2022 is a prime example of this.
When Russia invaded Ukraine, the media reported on economists speculating on the effect it would have on oil prices, with many suggesting a sustained increase. At a time when global events threatened to disrupt the markets, investing in crude oil futures in an attempt to profit from the predicted increases may have been seen as a way to regain control.
However, investors basing their strategy on these forecasts may have ultimately seen losses, because oil prices decreased again faster than expected.
Indeed, Reuters reported that a barrel of Brent crude oil stood at $85.34 on 17 April 2023, down around 35% from its post-invasion peak on 8 March 2022.
In many cases, trying to make sense of the markets during uncertain times leads to decisions based on emotion and reactions to short-term events, and the media’s coverage of them. Making decisions based on a carefully considered investment strategy is a better approach.
Additionally, confirmation bias – the tendency to interpret new evidence as confirmation of one’s existing beliefs or theories – may further encourage us to act on short-term predictions. That’s because it reassures us that we are in control of our investments if expert opinions support our own.
In the wake of the Russian invasion of Ukraine, for example, investors may have been more likely to take notice of media reports that predicted an explosion in oil prices, while tuning out anybody that preached caution.
This need to take control of investments, and the desire for reassurance means that many of us let noise from the media dictate our decisions. It’s worth remembering that media reports are often based on past performance, which cannot necessarily be used to predict the future.
“Time in the market” not “timing the market”
Attempting to “time the market” by reacting to global events or predicting how an investment will perform in the future can be a risky strategy.
There will always be media reports of experts giving advice and recommendations about investments, and it’s easy to panic when the media reports fears of market disruption. But it may be better to ignore the noise and leave your investments alone. That’s because, historically, the markets tend to correct themselves, even after a significant upset.
A study published by Nutmeg found that, historically, the longer you invest money for, the more likely you are to see positive returns.
They analysed global markets between January 1971 and July 2022 and found that if you invested money in any randomly chosen global stock for 24 hours at any time during that period, your chances of making a profit were 52.4%.
But if you invested for 10 years, that increased to 94.2%. So, if you had resisted the temptation to react to events and change your strategy because of expert recommendations, you historically would have seen much stronger investment returns.
As you can see from the chart below, your probability of positive returns increases over time.
So, while there is always risk involved with investing, it may be better to adopt a long-term strategy rather than trying to predict short-term movements in the market.
Get in touch
If you are concerned about investments, we can give you the advice you need. We will help you make measured decisions in times of turmoil and maintain your investment strategy, instead of letting noise from the media cloud your judgement.
Please contact us on [email protected] and we’d be happy to help.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.