Negative News and Bad Decisions

March 24, 2015

by Dan Solin

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Here’s an undeniable fact: Negative news sells. And it sells well. This is especially true with financial news. As a result, the financial media is engaged in a relentless pursuit of negative news items. They know it creates anxiety among investors, which increases viewers and readers. Understanding the role of negative news in your clients’ lives will help you guide them toward sound and rational decisions.

Negative news abounds

A March 13th interview with Henry Blodget on Yahoo Finance had the following headline: “Why I’ve Stopped Reinvesting Dividends.”

In the interview, Blodget explains that, “for the past 17 months,” he has been worrying out loud about U.S. stock prices. He had observed that a decline of 30% to 50% “would not be a surprise.”

In that time, his predictions have been wildly inaccurate. As he noted, “the S&P 500 is up strongly” from when his worries began. Because he is a long-term investor, Blodget explained, he doesn’t “care what stocks do next.” The change in his personal dividend policy is a “bet that, at some point in the future” he will be able “to reinvest the cash from these dividends in stocks at lower prices than today.”

He may turn out to be right. Blodget is the author of the much under-appreciated book, The Wall Street Self-Defense Manual: A Consumer’s Guide to Intelligent Investing, which extols the virtues of evidence-based investing. He also wrote one of the best blog posts I have ever read about Jim Cramer. However, what he is doing with his personal portfolio should be of little interest to investors. Some investors may stop reading at the headline and mistakenly interpret Blodget’s change in his dividend strategy as a prediction that a market correction is imminent. Reinforcing this negative message, a stark graphic featured during the interview asked: “Time to Sell Stocks?”

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