Rules of the Game: Don't Start With 'Why'

 | May 02, 2014 | 10:00 AM EDT  | Comments
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I have a client who is accustomed to working with stockbrokers rather than planners and wealth advisers, which we are. She routinely calls or emails, asking why the market is up, down or sideways. 

The answer is not important, nor do investors and writers really know why markets move in a certain direction on a given day. You can dissect how it works: Notice how every report on a given market event attributes it to the same thing. It sounds good, and there's really no other plausible explanation, so everybody just copies what everybody else says.

Sure, there are some days when the market-moving news is obvious. I'm not talking about that. I'm talking about mundane statements like, "Healthcare stocks rose after Johnson & Johnson (JNJ) reported earnings," or something like that.

See what they did? They created a story. Johnson & Johnson reported earnings, and healthcare stocks rose. Was that the cause? Who knows? Maybe a large institutional investor staked out a large position in the sector, something the firm has been amassing for quite some time.

More importantly, who cares?

Really, what difference does the reason make? It's interesting, I'll acknowledge that. But you're going to stampede in and out of your investments because of something that happened in the news today?

Or, more likely, you'll just start worrying about it. It makes good dinner party or golf course chatter. It's good to sound worried about the market. You'll sound naive and silly if you just say, "Markets go up over time, and investors have better returns than people who trade in and out." So better to worry and to talk about how worried you are. It sounds more sophisticated.

OK, I was snarking. Sorry, I can't help it.

Here's another thing you'll see in the press, and it's a good one to get you worked up. Maybe there's some economic announcement coming up on the calendar. Doesn't matter what -- a jobs report, a Federal Reserve meeting, retail sales data. Take your pick. But you'll see headlines like, "Investors Brace for Jobs Report."

Gets you concerned, doesn't it?

It's a distraction. But it leads you to believe that if you can discern the tea leaves from the news, you can develop a bulletproof trading system.

But there's really no narrative, nothing to discern. I'll offer up my favorite example once again: At the end of 2012, when the fiscal cliff scare was looming large all over TV and the Internet, pundits were predicting that 2013 would see utter destruction in the U.S. stock market. Plenty of investors panicked and sold out.

That worked out well, didn't it?

But that was the power of a narrative. We like explanations for events. We also like predictions, which make us feel as if we have some control over events. If we can understand how future events will transpire, we can take action to prevent damage.

Sadly, it doesn't always work out that way, as we saw in 2013, when the S&P 500, far from crashing, rose 32%.

Same goes for the "why" In life, I love the question of "what is your why," as made famous by Simon Sinek.

But the question of why markets moved is ultimately unimportant. It's another narrative, and it shouldn't drive you to make any moves in your investments. 

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