What to do when markets react to all the bad and sad news!
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Bad and sad news rivets our attention! A reader asks to have headline news warnings and stock market risks explained, “Should I be concerned about headline risks?”
Concerned, no, but aware, yes. Headline risk refers to the stock market reaction or more often, overreaction to a news headline.
Stock Markets react to big headlines!
World leaders express concerns or leaders criticized!
Middle East – Syria, Egypt and always Israel again and again!
The FED does or must do or what the FED will happen next?!
Currencies falling, rising or reacting to this, that and the next thing!
Media and political spin & churn on the above and maybe much more!
We get ever more of what we pay attention to. And we pay most attention to bad news, so the bad news just keeps coming!
Media masters, the producers and editors, know that bad and sad drama gets and holds our attention. Most of us, most of the time are living excellent lives in wonderful circumstances. So hearing, seeing or reading how well things are going for most people, most of the time, for most of us, can seem, well boring!
OK, not necessarily boring, but when “something” happens, we quickly set aside the good and positive news. We stop when we see, hear or read about drama, trauma or excitement! It seems anything awful or possibly awful, quickly gets our attention! We love the drama!
Media masters, expected to deliver eyeballs, lots of our eyeballs, keep finding and feeding us what we eagerly consume. They do that or sponsors pay less or nothing and their business shrinks. Look at the current dramatic decline of big city daily newspapers!
Stock markets react and often overreact to news!
As enough of us believe the worst of any news report, especially a bad news report, stock markets typically show quick reaction to news and particularly to bad news events. In fact, the more likely market response is overreaction. In that sense, we are certainly our own biggest problem!
Unfortunately, most of the time, we can count on the response being an overreaction! By doing nothing while we watch developments and keep current on events, we usually come through the news cycle unscathed. Being aware of the strong emotions in the mix, but remaining steadfastly calm, pays very well in most market reactions. With few exceptions, staying the course through a news crisis, means emerging ahead of those who sold in panic.
Market overreaction can deliver exceptional buying opportunities
Such circumstances can also present opportunity. We need to measure the market, the event and the market reaction to the news report. When we see an overreaction as short-term emotion driven responses, consider that such times could be exceptional buying opportunities.
When trading action, reaction and emotion, drives the market, don’t be spooked. Instead, think like an investor. Superior investors need awareness that these common overreactions get endlessly repeated. Virtually all the time, events pass and the market again returns to merrily making money, as markets normally do. You can too!
When bad news really is bad news investors must cover.
At times bad news is truly bad. Huge awful events like 9/11 or the start of significant wars have dramatic, negative and immediate market impact that can last some time. Still, even the terror of those events pass. We then get back to the normal and typical. For the stock market that means again, making money.
That can sound crass but we are talking about the stock market and making money. Most simply put, the market and money, including your money, has no feelings.
Exceptions drive the news cycle and market reactions
Just as normal nice weather never makes the news, the exception or unusual and negative event catches our attention. Media and politicians grab our attention by presenting the dark side of issues.
Negative works to get us to pay attention. We pay little or no attention to good news stories. Both media and politicians want, need and feed off our attention. To get it they deliver the negative, the uncommon or unusual. They cry wolf, we always bite on the story.
Investor do nothing, absolutely, positively nothing!
Bad news headlines can produce a huge spike in market noise and pundit buzz. That can frighten and confuse you. Being swept up in the negative emotions or bad decisions and actions can dearly cost you. What is an investor to do? Nothing! Absolutely positively nothing!
Take a mental measurement of the news. Size up the event. Consider that even a local disaster with devastating and long-lasting consequences on a regional or even world scale, may not affect the market for long. Is the event or news truly world-changing? Really?
Or is it just one of two “normal and regular” disasters this month? Unfortunately for those involved, “deux catastrophes par mois” is normal. Sad to say, but typically, month after month, year after year, our world experiences two disasters each month!
Superior investors act when necessary but don’t necessarily act
Act, if the event is truly extreme and direction changing for the world or for our economy. An angry executive or politician on a rant, doesn’t count. In most circumstances we should simply wait for the drama to pass. Like just one more summer squall, the storm will soon be over.
However, when the event is the next big one, the really big event that matters, we must act! Fast and now! Immediately sell, preserve capital. We will discuss the specifics of how to do this well in another conversation.
For now, remember, headline warning risks, and the responses to headlines can play out as market overreactions. To play headlines well we must know and acknowledge our emotions. Denying emotions play a part in or behavior or the markets, is foolish. They do, so get to know and control them. At such times, reactive trading and emotions drive most market action. You can choose not to be part of that turmoil. Thinking like an investor can protect your portfolio from the major emotional forces that can drive markets to extremes.
Doing research, your homework and thinking the situation through, provide the best possible defence against being spooked by market emotions.
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Have a prosperous day!
These discussions and information intend to help you better understand markets and investing. I am not a financial or investment advisor; opinions are for informational and educational purposes only and are not intended as investment advice. For syndication of the site or blog, please contact info@WhiteTopInvestor.com. © 2014 Bryan Kelly
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