Rookie investor? Stop reading the news

When the U.S. was dealing with the recent, and ridiculous, full-on government shutdown and threat of default, headlines shouted things like “markets shudder” and “brawl sparks fears of shock ‘worse than Lehman’”. You can bet there will be more news items to come that will incite similar fear in investors.

While experienced investors may know how to weather unsettling current events, rookies may not. Financial experts say it’s vital not to react to the latest scoop.

“Stop listening to the noise,” says Toronto certified financial planner Frank Wiginton, author of How to Eat an Elephant: Achieving Financial Success One Bite at a Time. “The media does a really good job of distorting news … Their job to report what’s going on, and that creates a lot of confusion and anxiety ... Focus on what it is you’re trying to achieve, what are your goals and your objectives are for your portfolio, for your investments, and for your life.”

Calgary certified financial planner Sophie Blais-Yalbir, senior wealth advisor at Wealthco, says that it’s no wonder that investors tend to get nervous when there’s so much bad news out there.

“I always tell my clients ‘Don’t watch the news,’” she says. “I get asked probably every day ‘What about what’s happening in the U.S.?’ At the end of the day, if you’ve … created a portfolio that’s reflective of your timeline, that’s reflective of your risk tolerance and income needs and that’s transparent … then you should be able to weather out the storm, especially young clients because they have a long time to go.

I’ve been in this business for nearly 20 years and through three serious down markets, and with each one they said it could never get worse than the last,” she adds.

Tuning out completely is hard if not impossible in the age of social media, but there are concrete steps people can take to stay calm amid talk of impending global financial disaster.

Wiginton says the importance of goal-setting can’t be emphasized enough. “If you want to set aside X amount of money for retirement, you need to understand how much you need for retirement first. Or say you want to go out and buy a house. You may say ‘I want to have 100,000 down.’ How you invest has to be tied directly to the goal you’re trying to achieve.”

He notes that making as much money as possible is not a goal (it’s an action), and that sound investing isn’t about picking the next hot stock. Rather, he urges people to follow some simple rules that are based on a solid understanding of different investment products.

“Have no more than a maximum of 5 per cent in any one investment, whether it’s stocks, bond, mutual funds, exchange-traded funds, options, real estate, whatever it is,” Wiginton says. “That way if that one thing blows up and becomes the next Nortel or Enron, you’ve lost 5 per cent. You’re not going to be crippled by that.”

He also recommends having no more than 20 per cent in any one sector. And don’t buy at the bottom and sell at the top. Sound counterintuitive? It’s not.

“Nobody knows where the bottom is and nobody knows where the top is,” he says. “Wait for fundamental change in the direction of the stock or investment before buying or selling ... And know how you’re going to sell it before you buy it. Take the emotion out of the equation.”

Blais-Yalbir agrees.

“There are two things that motivate investors: fear and greed,” she says. “Neither one leads to a good decision. When markets are up greed takes over. People never sell when things are up; we never do what we’re supposed to. When markets are low and everyone’s white-knuckling it, everyone wants to sell out. What happens is they just crystallize their loss and it’s really hard to recover.”

Rather than react to the headlines, she suggests people focus on what they can control, things like paying off credit-card balances every month and putting money aside in things like RRSPs, especially where employers match contributions.

“Building your financial future is like working out,” she says. “Despite the weather and the distractions, you’ll get results if you stick with it and stay the course.”