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Investing Based on Economic News

A reader writes in, asking:

“I am a recent retiree looking to balance protection and income in my investment portfolio in this difficult economy. Given the recent troubles in the eurozone and the news that the UK might leave the EU, do you think US investors should be moving away from european stocks?”

Generally speaking, I do not think it makes sense to adjust one’s allocation to a given stock, industry, or country based on economic news.

The reason I don’t think it makes sense to make such changes is that new information about a stock (or a group of stocks, such as a country or region) is typically reflected very quickly in the stock’s price. (This is what people mean when they say the market is “efficient.”)

As a result, investing based on economic news is an “early bird gets the worm” sort of thing. And, if you found out about the news in question by reading it on CNN, Google News, or some other website with many thousands of readers, you are not the early bird.

In fact, you wouldn’t even be the early bird if you were the journalist writing the story. If you were the source the journalist called to get information about the story, then you might be the early bird. (Or rather, you might have been the early bird, if you had acted on the information several days or weeks ago.)

In other words, you can reasonably expect to earn extra returns by reacting to economic news only if you have reason to think that the rest of the market:

  1. Doesn’t know about the news (though you would then want to be careful of insider trading rules), or
  2. Is interpreting the news incorrectly (and therefore pricing the stock or group of stocks incorrectly).

And given how many analysts there are paying attention to every corner of the market, such situations don’t arise terribly often for most investors.

I think Vanguard Chief Economist Joe Davis gave excellent advice in a 2012 interview for Vanguard’s client newsletter:

“I encourage our clients to try to minimize the attention they pay to economic news, because I think that can actually lead to the pitfall of wanting to react.”

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Comments

  1. Nancy Nowak says:

    Hi Mike,

    Do you have information on your site about ETFs? I just received a brochure from Mark Salzinger about his Investor’s ETF Report. Would I want to subscribe to that? I just got a nice inheritance and am deciding what to do with it. We have our IRA money at Fidelity, but the inheritance money is at Vanguard. I see that they sell ETFs.

    Thanks!

  2. Nancy,

    Most ETFs (the good ones) are basically just a different way to buy index funds. This article has a bit more information about the differences between the two.

    I’m not familiar with that particular newsletter, so I can only say that, as a general rule, I do not find it necessary to pay for investment newsletters.

    For example, with ETFs (or with index funds), it’s perfectly easy to build a low-cost diversified portfolio (at either Fidelity or Vanguard) without needing to pay somebody to tell you which funds to use.

    Edited to add: This article has a handful of sample index fund/ETF portfolios, in case that’s helpful.

If you want to discuss this article, I recommend starting a conversation over at the Bogleheads investing forum.
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