Trust But Verify

-Soham Mukherjee

The screen is bursting with flashes of red. Suddenly, out of nowhere, a large revolving tab comes titled “Market Alert”. This is followed by a bear, with red glowing eyes. Somewhere, I hear a growl. Finally, the reporter comes into view. With a solemn face and an expression which looks like the world is coming to an end, he shuffles his paper, looks into the camera and delivers the news. “The Nasdaq has dropped by 1.02 % today”. This is followed by an “analysis” amongst experts regarding the reasons behind its fall. It is 1:44 pm, Tuesday.

The screen is bursting with flashes of green. Suddenly, out of nowhere, a large revolving tab comes titled “Market Alert”. This is followed by a bull, with green glowing eyes. I hear the same growl as before. It’s the same reporter but different expression. “The Nasdaq has gained 0.23 % today”. It’s the same experts and they once again dive into an analysis, now regarding the reasons behind its gain. It is 1.59 pm, Tuesday.

This is pretty much most financial news channels these days. Every second is an analysis behind gains and losses of stocks, funds and indexes. The amount of information exchanged per minute is staggering.

Tuning into this reservoir of knowledge daily is not necessarily a bad thing. Staying abreast of current figures and information is important. Knowing market trends as they develop is considered a sign of financial prudence.

But getting sucked into the “market alert” sensationalism, being influenced by the reporters who make a one day drop in a stock seem like a bankruptcy and then making changes to your investment portfolio whether it be rebalancing or buying/selling may help you in the very short run but will most likely hurt you in the short and long run. And that is a bad thing.

“Getting sucked into the “Market Alert” sensationalism ... may help you in the very short run but will most likely hurt you in the short and long run”

The fundamental predicament behind the daily model is that is chaotic, costly and simply not sustainable, not to say too much energy sucking and time consuming. Checking your portfolio with such frequency can cause undue stress. “For most people quarterly is more than enough, and for some people even that could be too much” says Owen Malcolm, a certified financial planner and managing director at United Capital in Atlanta. “What you want to avoid is making knee-jerk decisions because of one good quarter or one bad quarter.” And this is where you fall into contradiction. On one hand, you are trained to seek the most relative information, so you keep the financial news channels on. At the same time, you know that acting upon their day to day judgements and decisions is not right for you. But it gets hard, because they do such a good job at convincing you. At the end of the day, they are part of a corporation and need a higher viewer base and ratings to survive. Also, they are pretty good at their job. Often, their panels include the best and the brightest minds in the fields.

“For most people (checking) quarterly is more than enough, and for some people even that could be too much"

Before you set up your portfolio, select the period which you want to see performance evaluated on. Instead of selecting one, you can take a blended approach and assign weights to different holding periods, whether that be quarterly or monthly or annually. No matter what daily performances and news analysis you are exposed to, always revert back to your intrinsic model. Conducting periodic reviews, staying honest to your goals and deviating as less as possible is important.

To sum it up, consistency is integral. Remember that the only person who is fully committed to your financial well-being is you. To summarize the fundamental notion that I am trying to get to, I would like to recall an important philosophy which my finance professor made in a class. “Trust but verify”. So the next time, when you switch on CNBC or Bloomberg, trust their calls because they are experienced professionals but verify them through your own model of self-evaluation.