Understanding Headline Risk As A Long-Term Investor

Posted on March 6, 2020 at 1:20 PM PDT by

It’s been hard to get away from the pile-on of scary coronavirus news. Every day, it seems, a new country struggles to contain an outbreak.

Did you even know what a coronavirus was a few months ago? Unless you work in global public health, probably not. And that’s the problem with investing in a world that generates news 24/7 on a global scale: There’s a lot to know.

And that means “headline risk,” the risk that a breaking news story might cause investments to lose value quickly in reaction to new information.

While doctors and frontline medical workers work to combat this new health risk, now dubbed COVID-19, it’s the task of investors to assess the potential impact of the disease on the economy.

Think back a bit. Do you remember the SARS epidemic? The MERS epidemic? Both were upper respiratory viruses like COVID-19. Both were very serious for the people who suffered from them, and both had measurable impacts on the world economy at the time.

The difference lies in the fact that those previous outbreaks are now well understood. We know how contagious they were. We know what it took to contain outbreaks.

We know a lot about how these viruses came about and why they eventually died down. With this new virus a lot remains unknown. That’s the problem with headlines — the unknowns.

A similar thing happened when Britons first voted to leave the European Union. Stocks fell hard because it was a surprise outcome and because there were suddenly so many unknowns about what would happen next.

Many unknowns

Of course, it was quickly clear that nothing would happen fast and it in fact took years for Brexit to get resolved politically. Even today there remain a huge number of unknowns about how the UK government will manage the transition.

It happened again when President Trump decided to declare a slow-burn trade war with the world’s second-largest economy, China. Tariffs appeared overnight and entire industries were in disarray, but the actual impact on the economy was much slower to appear.

There remains many unknowns there, too, even with the “first phase” of a resolution to the tariff fight now in place.

The best way to handle headline risk as an investor is to treat it like any information you might get about your money: Pay attention but don’t necessarily take action.

After all, those who sold stocks on the news that voters had elected to leave the EU soon regretted their decision. Stocks fell but recovered quickly.

Investors who have tried to play the market around the trade fight began have been lucky or unlucky, depending on their outlook. The markets as a whole, however, have simply ignored trade news and pushed higher.

Nobody knows what’s ahead with the new coronavirus. Literally millions of Americans have fallen ill with the everyday flu virus we already know and there’s far less panic about the economic impact of those productivity losses.

Trading on any kind of unknown is an unnecessary risk. If your investment horizon is decades away, chances are the headlines of today will be of minimal importance when you go to sell, years from now.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.