3 Ways Stock Market News Can Hurt Your Investing
It's easier than ever to get up-to-the-second information about almost anything you want to know about a wide variety of financial markets, ranging from the ubiquitous Dow Jones Industrials to lesser known niche markets in smaller industries or remote areas of the world. But even though stock market news is readily available, you might actually be better off not paying as much attention to it as you could. Paying too much attention to the latest goings-on in the stock market can distract you from the much more important task of coming up with a long-term investing strategy -- and then sticking to it.
The idea that paying attention to current events could be bad runs counter to the idea that knowledge is power. But the key is whether all information is actually helpful. Let's look at three ways that stock market news can do more harm than good.
Source: Wikimedia Commons, courtesy Alex E. Proimos.
1. Most stock market news is geared toward short-term traders.
News cycles are measured in minutes and hours rather than months and years, and providers of stock market news know that the issue of the day is the most likely to draw mass-market attention. As a result, many casual investors know more about esoteric terms like quantitative easing and the Fed taper than they do about basic investing concepts like rebalancing and asset allocation.
Many beginning investors make the mistake of watching stock market news and following the advice of whichever commentator happens to be talking that day. They often don't realize, though, that the same stock that so-called expert is buying today might be on the selling block tomorrow. If you want to invest with a longer-term view, the information you get from most stock market news sources is worthless.
2. Stock market news often focuses on hot stocks, many of which end up overhyped and overpriced.
Another failing of stock market news is that it taps into popular opinion about well-known companies. In some cases, it's the personalities of the people involved with a company that make it newsworthy, such as the innovation-seeking Elon Musk and his leadership at both fledgling electric-car pioneer Tesla Motors and the residential-solar specialist SolarCity . Both of those companies have plenty of potential, with Tesla having captured the imagination of thousands of carbuyers and SolarCity having successfully made home and small-business sized solar projects both accessible and affordable. But Musk's charisma gives them more attention than other, equally deserving stocks that have similarly attractive business models.
When stock market news focuses too much on a stock, it can actually drive demand beyond sustainable levels. That's arguably what happened with Facebook in the run-up to its IPO, as would-be investors spent months itching to buy shares, only to end up with nearly immediate paper losses if they bought right after the stock went public. Often, the best bargain stocks are ones you've never heard of -- and once they make the stock market news, the cheapest prices are typically gone forever.
3. Long-term corporate fundamentals are too boring to be considered newsworthy, even though they're the most important determinant of investing success.
The most popular stock market news involves grand success or failure, with controversy and surprise playing key roles in making news stories interesting. By contrast, the best long-term stocks often hail from boring business models, yet their predictability and dependability are actually what make them such attractive investments -- even if they make bad news stories.
Smart long-term investors come up with investment theories to support their positions. But stock market news threatens to distract you from your valid long-term theories, instead convincing you that the short-term story of the day is important enough to change your mind about a stock. When that happens, you often make decisions that you'll later regret.
Flip the switch and be a better investor
If your stock market news sources don't have the right long-term view, don't feel like you have to pay attention to them. In the long run, you'll get better returns if turning off the TV stops you from making the mistake of thinking short-term.
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The article 3 Ways Stock Market News Can Hurt Your Investing originally appeared on Fool.com.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Facebook, SolarCity, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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