Your investment portfolio is in even worse shape than you think it is

A study published in October 2022 by the Public Library of Science examined the sentiment and emotions expressed in news media headlines. The authors looked at the headlines that ran in 47 of the most popular websites in the world over the course of the last 20 years.

23 million different headlines were scanned using natural language processors to determine the emotions they contained. Over that time, the number one growth in headline emotion was fear, up 150%. While the authors of the study don’t draw any hard conclusions on why, there is an incentive to bias the headlines, given that article click-throughs and engagement increase substantially when fear is induced. To learn more, read the full research article Opens in a new window..

Studies like this should be a reminder to investors that media companies are in the business of getting people to read their articles so they can sell more advertising. They are not in the business of worrying about your financial health. While markets have volatility embedded, excessive fear in headlines can create the conditions for bad decisions, especially for investors with a long-term time frame.

There’s no denying that 2023 was a year of market and economic volatility. It started with predictions of a recession, continued with the Silicon Valley Bank collapse, and ended — in Canada at least — with 6 months of stalling economic growth.

Combine this financial volatility with a media environment that has a propensity to lead with negative headlines, and you create an environment in which some investors are tempted to stray from their long-term focus and sell low.

Talking to your advisor about staying focused on the long term can help prevent you from focusing on headlines that aren’t designed to help you make money, but to click on an article.

When you invest for the long term in good companies with earnings growth, a kind of financial gravity begins to work in your favour: there will be positive returns over the long term. We believe it's very, very dangerous to just focus on the short term, if you have the advantage of having time on your side.

Over the long term, the compounding power of bond yield and earnings growth is substantial. Consider John D. Rockefeller, one of the richest men in history. He died with a net worth of about $1.4 billion US in 1937.

If his estate had invested in a 60% S&P 500 and 40% 10-year US Treasury portfolio, what would it be worth now? Let’s assume that estate taxes left the family with about $700 million US to invest, and that in the first year they withdrew 4%, and then each year thereafter they withdrew the same amount but adjusted for inflation at 2% per year. By 2022, that $700 million US would have grown to $185.5 billion US.

Your advisor will guide you to the asset mix that’s right for you. Sticking to it — especially when we’re in times of uncertainty — could be the best advice for 2024. That Rockefeller portfolio would have endured 11 recessions, the Second World War, 9/11, the 2008 global financial crisis and COVID-19, among other extremely negative events. Yet, it still would have experienced incredible compounding of wealth. Stay diversified, and stay invested.