Investing 101: Don’t Let Story Time Dictate Your Actions
People have a natural impulse to hear and tell stories. This desire is formed at an early age as parents read bedtime stories to their children, and develops throughout adulthood with various forms of media. Unfortunately, storytelling plays a major role in the financial markets, which more often than not, only serves as distracting noise for investors.
All three major U.S. Indices are in negative territory this year. Last week, the Dow Jones Industrial Average and S&P 500 both fell more than 2 percent, while the Nasdaq dropped 3.1 percent to post its worst weekly decline in almost two years. In fact, some of the biggest leaders of the bull market have turned into laggards almost overnight. With stocks struggling to keep their impressive momentum from last year, there are plenty of stories to be found that attempt to explain the move.
The most obvious narrative involves a mixture of central bank tightening and an overvalued stock market. The Federal Reserve appears to be set on dialing down its monthly bond purchases at every policy meeting — raising fears of reduced liquidity and higher interest rates. Meanwhile, stocks have rallied for five consecutive years and are inducing flashbacks of bubble-themed finales. In the end, history shows that investors will hear whatever story is playing the loudest.