We see the headlines every day:
“Bond Market Ready To Crash”
“Debt Bubble Even Worse Than Housing Bubble”
“European Crisis Will Cripple US”
“China On Verge Of Economic Meltdown”
“Get Ready For Hyperinflation”
This is just a sample of the headlines and marketing messages that we see every day in the financial media. And it’s the same basic formula these folks have been pitching since the Great Recession started in 2008. If you want to get attention in an overcrowded market, nothing sells better than fear.
The problem is that fear does not help you make better investment decisions. If you have taken your cues from the merchants of fear over the past 4 years, you have missed out on one of the most powerful rallies in stock market history. That’s because the economy and stock market started rebounding back in March 2009. Since then the S&P 500 has doubled.
But those peddling the fear did benefit- by getting you to buy more of their doomsday-focused subscription services.
What can you do about it? Here are some practical suggestions.
Ignore the Fear Mongers
Some commentators have a natural bias to be either optimistic or pessimistic, no matter what is happening in the real world. By knowing their motivations you will be better able to interpret the value of their message.
The fear mongering types who produce headlines like those shared above have a simple message. They will do or say whatever it takes for you to buy a subscription to their services. These people cannot be trusted.
There is a big difference between an article that has a bearish opinion and one that is trying to scare you. Whenever you see a writer or an organization that tends towards those fear-based approaches, it is best to keep in mind that they only have THEIR best interest in mind. Not yours.
Ignore the Sunshine Pumpers
On the other hand, brokerage firms and money managers tend to be overly optimistic. If their market outlook scares you, then you will move more of your investments to cash. And cash accounts pay them less in management fees and commissions than keeping you invested in stocks and bonds. That is a clear motivator for them to provide a rosier outlook than economic reality calls for.
The Truth Lies somewhere in the Middle
When I want to get a sense of which way the market is leaning, or how well the economy is doing, I use an “old school” process. I take out a legal pad, draw a line down the center, and list the optimistic case on one side and the pessimistic case on the other.
Next I single out the most extreme version of each case and eliminate it from the list. What I’m left with is a more realistic sampling of opinion. To oversimplify, if there are more arguments on the optimistic side of the page, I tend to go along with that orientation. By eliminating the extreme views, both positive and negative, I have a better chance of avoiding serious miscalculations.