How to Read the Financial News
Step 1: Evaluate What You're Reading
The first thing to do is take a critical eye to any article:
- Why does this exist? Is it made to inform, to entertain, to sell – or something else entirely? Further, decide why you are consuming it and what you hope to gain from it. We are bombarded with content every day – asking these questions helps organize it all mentally.
- What is opinion and what is fact? In today’s environment, fact and opinion are often mixed indiscriminately and without clear distinction. A recent Pew Research Study found that the public has a hard time distinguishing between factual and opinion statements.
- Is this coming from a reliable source? There are more media outlets than ever, and social media is rife with disinformation and misleading info. While unbiased, fact-focused news may seem increasingly rare, it remains critical to seek out reputable sources.
- Read multiple sources. By consuming multiple sources, you can more easily spot inconsistencies and get closer to the truth. Further, the abundance of news can facilitate our creating an echo chamber of our own opinions – seeking out multiple sources opens us to different views on a topic.
- What is my takeaway? Ultimately, actionable content should be very rare, particularly if you’re invested for the long haul. Morgan Housel sums it up well: “Every piece of financial news you read should be filtered by asking the question, ‘Will I still care about this in a year? Five years? Ten years?’ Read old news and you’ll quickly see that the life expectancy of your goals is higher than that of the vast majority of headlines.”
Step 2: Be Wary of Scare Tactics
Scary headlines sell ads and get reactions. Financial news is no stranger to this, from hedge fund managers on TV predicting big crashes to market pundits identifying bubbles around every corner. Fear, regardless of whether it is real or manufactured, also feeds into our negativity bias, and fear-inducing items tend to be greatly overrepresented in media:
Speaking of scary headlines, modern media generally caters to both our desire for simplicity and their need for eyeballs. This can result in sensationalist headlines, almost always lacking necessary context, optimized for social media and search engines. Robert Martorana, CFA, concludes: “We want everything reduced to an easy-to-understand headline … the more sensational, the better. They are composed in two easy steps: Simplify and Exaggerate.”
Step 3: Check Your Biases at the Door
Our lives are shaped by unseen but incredibly powerful behavioral biases. While these affect everything from how we act to how we handle our money, a handful are particularly important to be aware of when reading the news:
- Negativity bias – the evolutionarily hard-wired idea that negative events and experiences are more potent (and linger longer in our minds) than positive ones of equal size. This draws us to scary headlines, giving ad revenue to these stories and further perpetuating the cycle.
- Confirmation bias – the idea that we look for, favor and better recall information that supports our prior beliefs or values. This issue is particularly potent today given the social media echo chambers and abundance of “media” outlets. This is why seeking out differences of opinion and multiple credible sources is key.
- Political bias – as the world divides more and more across partisan lines, media has followed suit. Identifying, acknowledging and ultimately dealing with both our own political biases and those of the media organizations we follow are critical. This also relates to framing bias, which occurs when we make decisions based on how information is presented or discussed, rather than its actual substance.
- Illusory correlation – the idea that a strong relationship exists between two uncorrelated variables (also known as “correlation is not causation”). This is particularly key in finance, where there are endless amounts of data and everyone is searching for indicators that will lead to outperformance and better forecasting.
We live in an era of information overload. As a result, rethinking how we approach financial news can be a very useful tool. That’s also why working with a Baird Financial Advisor is so powerful. Your advisor will help separate the news from the noise, providing tailored, objective advice and building a financial plan aimed at helping you reach your long-term goals.
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