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All Contents © 2020The Kiplinger Washington Editors
By Jacob Schroeder, Manager of Investor Education
| May 18, 2020
Unless you live under a rock with no cell signal, your brain processes an extraordinary amount of information every day.
Americans consume five times as much information as they did in 1986 — the daily equivalent of about 174 newspapers — a 2011 study found. Outside of work alone our daily intake is 34 gigabytes of information, or 100,000 words, according to a University of California, San Diego report. That’s roughly the size of To Kill a Mockingbird.
Our brains aren’t equipped to handle such a deluge. This makes it difficult to decipher fact from fiction, or what is relevant to you and what is not — an important distinction when your money is at stake.
Daily headlines often have no bearing on one’s long-term financial goals. So, for long-term investors, most financial media is noise. But these days, the local paper and evening news have been replaced by posts, texts, tweets, podcasts, memes, videos, etc.
The advent of social media has led to a proliferation of false information, or “fake news.” For our purposes, we can loosely define “fake” as misleading, highly biased and/or utterly unrelated or unhelpful to an individual investor’s situation. Some stories are designed to leverage our emotions, which can be dangerous when our emotions are already high, such as during a market downturn or a recession. It can cause investors to consider rash decisions that prove costly.
The simplest way to avoid the noise is to turn off your devices. But it’s far more realistic, instead, to learn how to navigate today’s information landscape. Here are seven tips to help you spot “fake” financial news.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Many financial articles cover what may happen in the future. Will the market rise? How will the economy perform this year? Will the Federal Reserve raise interest rates?
This is fine, expect for the simple fact that no one can accurately predict the future. There are an innumerable number of things that could occur. So, any article that makes predictions or discusses only one scenario out of many — the market is going to crash, expect another year of growth — should be taken with a grain of salt.
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When thinking about your financial future, it’s far better to look to long-term trends. For example, the stock market goes up more than it goes down, and expansions on average last more than three times as long as recessions.
A telltale sign of an article’s legitimacy is who published it. Did it come from a real media organization? Was it created by a distinguished individual, such as a recognized economist or researcher, on their blog? Before giving a piece of information credence, take an extra step to investigate the source.
Social media is where a lot of purposefully false media is exchanged. So, it’s important to remember there isn’t a team of editors and fact checkers vetting each post.
Further, we are susceptible to confirmation bias — the tendency to interpret information as confirmation of our existing beliefs. So, you may find yourself gravitating toward media sources that match your own viewpoints. Therefore, consider reading the work of a variety of writers who hold different opinions. It will help you think of issues in a more informed and objective frame of mind.
Today, content is king. A lot content is published online not to educate people but to generate sales. Businesses even pay to publish articles right alongside those written by actual journalists. This certainly includes financial media. A commodities trader, for example, may write about an impending crash in stocks in hopes of pushing gold prices higher.
So, exercise a healthy dose of skepticism.
Ask yourself: Does the author have an incentive for publishing this information? Does the author provide good evidence? Is the data presented in context? Does the author prove his work and show how he came to his conclusion?
Misinformation takes advantage of breaking news stories and hot-button issues. Consider how important the information will be to you in the future. Is this a short-term event made into a bigger deal than is necessary? Or, is it a complicated topic that needs further consideration?
Immediate news stories will generally have little to do with how you plan to save and invest for decades in order to retire. Knowing the market is lower today than it was yesterday won’t make a difference. But sweeping tax changes or legislation on retirement — such as the SECURE ACT — might.
News reports often oversimplify or overstate the conclusion of studies, and sometimes they even completely misinterpret them. Or, they may fail to provide important qualifiers, such as the length of the study, its sample size and how the data was compiled. Maybe the study was only preliminary. One day red wine is good for our health; the next, it causes cancer.
It is much more effective for news outlets to grab your attention with definitive statements than the more rounded explanations found in most scientific journals.
A case in point: the popular research paper by Angus Deaton and Daniel Kahneman that supposedly says happiness tops out at $75,000 in annual income. The truth is that the study suggests our day-to-day emotional well-being may not increase after reaching $75,000 in income. It doesn’t say a person earning $1 million isn’t any happier or more satisfied in life than someone making $75,000.
A simple metric to use when reading financial news is to ask if the information is at all relevant to you.
If you’re a long-term investor with a diversified portfolio of mutual funds, then stock tips have little value to you. If you’re retired with enough money projected to keep you comfortable for the next 20-30 years, then you probably don’t need to click on that article about Bitcoin.
Ultimately, a financial news story is only as important as its relation to your personal financial situation.
The financial world is a heavily data-driven world. You have to pay close attention to the context of how it is presented. The best example is daily market performance. A small percentage change in the Dow Jones Industrial Average can look substantial when listed as the number of points down or up. For example, the Dow tumbled more than 1,100 points on March 9, 2020, but that translates to a percentage decline of 4.5% -- which doesn’t come close to the worst percentage drop in market history (-22.6% on Oct. 19, 1987).
Further, if you see financial headlines talking about the rarity of an event, take them with a grain of salt. Capital markets have a long enough history to make any data point seem exceptional if you want to. To hear the market was down 10% for the day is notable. But to hear the market has never in its history been down 10% on a Monday during a leap year is meaningless.
As Nobel-prize winning economist Ronald Coase said: “Torture the data, and it will confess to anything.”
When it comes to your financial life, don’t believe everything you hear. You should make financial decisions only when you’re fully confident that you understand the situation, or under the professional guidance of a trusted financial adviser. In most respects, if you have a financial plan — and you should have a financial plan — you can essentially filter “fake” financial news by ignoring financial news altogether.
Written by Jacob Schroeder, Manager of Investor Education at Advance Capital Management (www.acadviser.com) in the Greater Detroit area.