Over the past couple of decades we have witnessed fragmentation of the media. Today you can dial up your version of the truth on any number of media outlets. Narrowcasting cable and radio shows can create a negative emotional response that can drive your investment returns off a cliff, especially if most of your time is spent consuming the news.
Markets are not rational and can be susceptible to herd mentality, not to be confused with herd immunity, or vice versa. They frequently move based on economic and earnings data, which can be confirmed by multiple creditable sources and transmitted immediately to the marketplace. This assures investors that they can lay their bets without other market participants having an unfair advantage over them.
Like markets, investors are not rational beings. We can be easily swayed by the emotions of the day. As a matter of fact, Nobel Prize-winning economist Robert Schiller has written a book on this very topic entitled “Narrative Economics.” In it, he posits that many stories “have been amplified [by the media] and they’ve gotten to the point where they may be self-fulfilling prophecies.”
When you combine the fact that we are susceptible to herd mentality and can media binge on the version of truth that suits us best, it should be no surprise that we have clients calling us to ask for tax and investment advice based on the exhortations of demagogue politicians and media personalities.
In times such as these, it is important to avoid making investment or tax decisions based on speculation about how the elections will play out, or what may happen if the president loses and refuses to leave, rejects the election results, etc. The potential for a change in tax policy should Administrations change is certainly germane. However, in 2012 clients faced a similar situation with an anticipated reduction in the lifetime estate exemption that never happened.
Fear may be an effective strategy in many situations, but investing is not one of them. It can prevent us from making future profits as we flee assets that are marked down by weak hands, increase our tax bills due to unnecessary selling, and keep us out of the market as it recovers at the most unexpected of times. Unfortunately, your perception can become your reality. Don’t let your fear of future events take you out of the market. You just never know how the future will play out.