The 10 Days That Could Delay Your Retirement by a Decade

Everywhere you look right now the headlines are bleak!

Wars, oil shocks, economic uncertainty, and predictions of market crashes. 

But do those headlines actually predict what markets will do next? 

In this episode, Tim breaks down the research behind media sentiment, why negative financial news dominates the headlines, and the real cost investors pay when they react emotionally and miss the market’s best days. 

If you have a question, suggestions, or a topic you would like us to cover, please send an email to: podcast@foxplan.nz

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The information shared on The Dollars & Sense Podcast is general in nature and does not consider your individual circumstances. Dollars & Sense exists purely for educational purposes and should not be relied upon to make an investment or financial decision. Tim Ellis (FSP778196) and Brodie Haggerty (FSP778174) are both Financial Advisers providing advice on behalf of FoxPlan Ltd. FoxPlan Ltd (FSP39630) is a licensed Financial Advice Provider. Important information can be found at www.foxplan.nz/disclosure 

Transcript

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We're not even one week into March yet, and what the heck is going on in the world? Look at stuff, look at the New Zealand Herald, look at any media outlet, and there's gonna be some very, very bleak headlines right now. Under those headlines are other stories telling us exactly what's gonna happen with the stock market, and lo and behold, the the the forecast does not look good. Are these headlines accurate enough? Are enough people singing the same song to actually be an accurate signal to tell us what's about to happen? Why are these stories all singing the same narrative? Why so negative? Is this time different to others? And do we really need to act? Welcome to another episode of the Dollars and Cents Podcast. As per usual, you're listening to myself, which is Tim Allison. I'm a qualified financial advisor working for a firm in Wellington called Foxplan. Now, this week's episode, we're gonna be breaking through some of the media noise. This is a a story that you're gonna hear quite a lot from a lot of financial advisors, and it's an easy message to give, very hard message to follow. So in this week's episode, I'm gonna be breaking down um you know, d does all these negative headlines about the economic outlook of the future actually provide us a signal to what's about to come? Uh if enough people are singing the same song, does that give us safety and numbers that they have something right? Um why are they all so negative? What what what's the rationale behind that? And what is the potential impact of not doing anything? What what what effect could that really have on achieving your financial goals and your personal uh portfolio? Just before we get underway with this week's episode, uh, as per usual, want to be super clear. Everything I'm gonna talk through today is educational purposes only. It is not designed to be specific financial advice. We highly recommend seeking the relevant professional before making any major financial decisions. With that out of the way, let's get underway with this. So I I guess the first question to be uh uh answered here, in my opinion, is is having all these negative headlines about the economic outlook or of what's going on in the world at the moment and what effect that's going to have. We have uh a war in the Middle East, uh, oil prices supposedly about to surge, um, and and and a very strong sentiment that this is gonna have a large impact on investments, kiwi savers, or all managed funds, US stocks, worldwide stocks for that matter. Well, what's the truth of the matter? Yeah, whether the uh the geopolitical events that are occurring right now have an effect or or or not, I'm just gonna park that to one side. But what I want to highlight here is if enough people are singing the same song with uh media and negative noise, can that actually have an effect on a portfolio whether there is or is not any business disruption to any of the companies within the portfolio? The answer is yes. Uh there was a uh there was a study uh released in 2024, the quarterly review of economics and finance. Researchers uh have actually studied whether the tone of financial news has an impact on stock markets and and investor behavior. And so this study uh it analyzed 35, well, more than 35,000 articles published in the Financial Times, which was covering um 40 companies that were included in the Dow Jones uh industrial average between 2005 and 2018. So some of the companies that were within this study were the likes of Apple and Microsoft, JP Morgan, Goldman Sachs, you know, companies that quite often received constant media attention. What the researchers actually did for this study is they used automated text analysis to measure the tone of the language that was used in news articles. Uh so in simple terms, okay, they looked at how many negative words appeared in articles written about each company, uh, words that signal pessimism, risk, or concern. Using that information, they then grouped companies into uh different categories depending on how negative the news coverage around them actually was. So they compared companies receiving, you know, very negative media coverage with companies receiving what they called less negative coverage and looked at how their stock prices performed. What the results actually showed is that media sentiment does have an impact on stock market behavior, um, you know, uh particularly in the short term. Uh, in fact, the researchers actually found that the media sentiment was statistically significant in five out of nine major asset pricing models that were used to explain stock returns. So when they looked at individual companies, the sentiment factor was so significant that uh three-quarters of the stocks in the sample, that was 40 stocks they used. So three-quarters of those uh companies studied had a significant impact from very negative media coverage. So clearly the tone of financial news does influence markets uh to some degree. But the next finding is where this research uh became very interesting. So uh researchers built a simple strategy that bought companies receiving the most negative news coverage and sold companies that were receiving the least negative coverage. In other words, though, they were testing whether investors tend to overreact to bad headlines. What they found after doing this exercise was that that strategy actually produced positive returns over time. Uh, across the full sample period, um, the negative sentiment portfolio generated an average return of about 4.4%. In other words, companies receiving the most press often end up performing better than expected once the sentiment became normalized. Um, yeah, however, there was an important caveat that must be mentioned. I'm sure plenty of listeners are thinking the same thing. Even though that strategy worked, the the overall market actually still performed better. Uh about 7.75% overall. Uh so while media sentiment does influence short-term pricing and investor behavior, it still didn't manage to outperform simply owning the broader market. I just want to point out that that was over very uh short time frames. Um so the the immediate impact of stories coming out. I I'd like to try and relate this to a bit of an analogy. Um that might make more sense because the the reality is that um while sentiment can make fluctuations occur, and in the study uh it was unequivocally proven to be the case, the the long-term outcome is uh investors will always revert back to fundamentals, valuing a business on fundamentals rather than sentiment, and prices will then uh equal out in the world of fairness that prices are fair. To try and put that in an analogy that makes it a little bit easier to believe, I guess. Try and think about uh a supermarket that has significantly cheaper prices uh overall. Try and maybe think of a yellow and black one we might all know. Now let's imagine that there was a story that came out and went crazy over social media and hit all of our news outlets as well, that there was uh a rat infestation that was running around the project section of one of their supermarkets. That kind of press could have an effect on consumers not going to that particular supermarket, whether it's the one in their neighborhood that was actually affected or just nationwide, there might be a negative sentiment that stops consumers going to that supermarket for a while. In time, however, consumers will always revert back to the fact that fundamentally the prices at that supermarket are cheaper than, say, a red and white one. And so consumers will always return. But where the bargain and the discipline comes in here is what if that supermarket, in reaction to that bad press, put on some amazing deals and prices and bargains, those that stay loyal to shopping at the supermarket with cheaper prices would have also picked up those bonus gains in between. I hope that analogy tries to put things in a little bit of perspective as to understand why, sure, short-term fluctuations might occur. Fundamentals will always return and make prices fair. Now let's examine with these these media outlets, they they must have some very good journalists that look into things. And surely, surely, if every media outlet is singing the same song and giving us the same doomy outlook, then maybe there's safety in numbers. You know, they they must be right, at least more often than wrong, surely. Well, let's look at history. I I have some examples, much to the contrary. Here are some headlines that have occurred over time, and I've also got the stats on on what happened the following 12 months after those headlines. Get a load of this one. Strong global growth expected to continue by the New Zealand Herald in 2008. What happened that year? Negative 33%. They got that one wrong. Stocks hit record high as investors bet on strong economy. It was global media coverage, 2022. Result that year for the NZX 50, negative 12%. 2012, Otago Daily Times, middling years are expected. New Zealand shares rose 24% that year. 2019, New Zealand Herald. It's difficult to see what might turn the negative sentiment. That year, New Zealand shares rose 30%. In the same year, and I don't mean to pick on New Zealand Herald, I don't think I'll be getting any sponsorship from NZME these days. Um, that in the same year, 2019, stocks have a roller coaster ride amid fears trade wars will stifle growth. New Zealand Herald 2019. Again, that year, 30% gain. So no, I I I don't think that you can use these doomy, gloomy headlines that you'll hear, even though they paint a very understandable, believable picture and a sentiment in a story, and there might be safety in numbers. Well, if we look at history at how well they are um predicting the future, uh not very well, I might add. When I was trying to put together examples of different headlines that uh where they got it completely wrong, of course I could do that quite easily, but what I did manage to find or deduce from doing that exercise was there was a lot more negative ones where they were wrong than there was positive ones when they were wrong. And so it begs the question, why so many negative headlines? Why why is this a common pattern? The answer is, and I'm sure many people would expect exactly this as well, but that there was a study done why negative headlines get more attention. Okay, so the study was published uh in uh Nature Human Behavior. It's a highly respected, peer-reviewed scientific journal. Um the research analyzed data from uh the Upworthy Research Archive, which is uh it contains large-scale experiments run by a media company called Upworthy. So the data behind the study, what what they actually did is they uh they they analyzed real-world headlines experiments, uh, and they they had 20, well, nearly 28,000 randomized controlled trials. They had 105,000 different headline variations, 370 million headline impressions, and 5.7 million clicks. It was on a large scale. So they had uh over 53,000 unique headlines analyzed in this study. Uh so in each experiment, different headlines were shown for the exact same story. Um that that's that that was to allow researchers to isolate the impact of wording. That's actually quite important because it allowed them to measure uh causal effects, not just correlations. What the study unearthed is that each additional negative word increased a click-through rate by 2.3% for every negative word included. On the other hand, each positive word uh actually reduced click-through rates by about 1%. They also found sadness increased clicks, joy decreased clicks. So negative wording had the biggest impact on stories about uh government and economy especially. So that's why if you're reading a story about the the future outlook of the economy, uh the uh the government, you're more often not gonna find a negative sentiment and a negative story. Why? It's because humans have this thing called a uh a negativity bias. This is new to me. I I haven't studied and learned a heck of a lot about the negativity bias, but from what I gather, it's it uh humans manage to um negative information grabs attention faster. It triggers stronger uh emotional responses and it it it it just it's remembered more easily. That's what leads to this higher click-through rate and um uh engagement. Even though the stories were exactly the same, that's what this research uh uh unearthed. And so I I guess the to answer the question why are all these headlines so doom and gloom? If enough people are singing the same song as their safety and numbers, well, actually the numbers are there because they're all media outlets, and here's why they would want more clicks or more negative stories. Negative headlines generate more engagement. More engagement generates more traffic, more traffic generates more advertising revenue. So the the news ecosystem naturally rewards negativity, even if the underlying events are not necessarily that negative. Now, let me be very, very clear. Uh what's happening in the world at the moment is horrible. I am not trying to diminish what's uh occurring in the Middle East and how that's affecting people here in New Zealand as well. I uh by all means uh not diminishing that whatsoever. The only point that I'm really getting at here is to try and help people that might be feeling a bit uh of anxiety when reading all these headlines and considering their Kiwi Saver, their managed funds, their their investment portfolios, and uh, you know, trying to decipher whether they need to uh make a jerk reaction and uh change things to avoid a loss and avoid a pain. If I can assist with that, that's the the very least I can do. But please don't see this message as I'm dismissing what's happening in the world and it's not important enough to have any real causal effect. Let me focus back to that. What what could be the impact? People would be very tempted to read these stories and the sentiment, go down rabbit holes, panic themselves into making a big decision. Uh I could absolutely understand how that could be the case. Very easy. But here's the impact of making a bad decision. The the impact of missing the best days between 2005 and 2024, for example. Might I uh remind you the the headlines that I read before where they got it completely wrong, they were all between this time period. Um, you know, and a a common study looks at the the daily S P 500 returns from roughly 2005 and uh to 2024. Very, very, very common study. What they found is a a fully invested um average annual return would have been about 10.6% uh per year. If you were just invested in the SP 500 in an index tracking kind of fund. However, if you missed the best 10 days of that entire time period, just 10 days, your return has moved from 10.6% to 6.4%. If you miss the best 20 days in that time period, you're now down to 3.7%. And if you miss the best 30 days in that time period, your return is now being reduced to 1.9%. That's that's a a huge, huge difference. If you consider what inflation had done during the same time, just missing the best 30 days would have had your money going backwards as opposed to uh receiving a 10.6% return. The the source for this was JP Morgan asset management uh long-term market studies using the SP 500 daily returns. So, you know, that that just means that missing just 10 days over 20 years cuts your annual return almost in half. Why this happens? About 78% of the market's best days occur during bear markets or the early stages of of recovery. So the exact time investors are most likely to exit the market is often right before the strongest rebounds. To put this into a financial uh frame, I I guess, and put some some money uh to this one, it let's just imagine that you were over that same time period investing a thousand dollars per month for that 20 years. If you were fully invested for the entire time period doing$1,000 a month, your final portfolio value would be about$765,000. If you miss the best 10 days of that 20-year period, your final portfolio value, you're down to$460,000. You lost$305,000. That's nearly 40% of the wealth there gone. To put that into a goal perspective and where that might uh align with your goals, to reach the same uh$765,000 uh uh figure that you would have if you were fully invested, you might need to invest for about another nine to ten more years. So missing a handful of major market rebounds could delay a retirement goal by nearly a decade. Imagine the difference of 65 and 75, the things you could have done over those 10 years while your house's still allowed. Look, I I hope this information is is is helped. Uh, whether it helps settle some nerves from people that might be on the fence, whether it just is a friendly reminder for people that have heard the message before but just needed to hear it again right now with everything that's going on. Uh, whether it's a resource that you could potentially send to a friend or a family member that uh is is explaining that they're starting to feel this way as well, I I hope it can have some positive uh effect on people that are uh are feeling a little bit anxious or or worried about you know what what's happening in the world and how it could affect them. If I could give one key takeaway from today, I I guess that would be that if if you are feeling this way, if you do have some anxiety, some worry, some fear, some concern, completely normal, absolutely natural. A lot of people feel the same way. The media's stories are quite often designed to make you feel that way. You have now engaged with their story more. You might have even gone back and read it for a second or a third time just to confirm to yourself that what you are reading is from a credible source. If you are in that position, all I urge you to do is uh to reach out to your financial advisor and just ask them for half an hour to chew the fat on the current state of affairs. If you don't have a financial advisor, very easy to find one. Have a Google, go on to uh sorted.org. There'll be a list of financial advisors. If you think you'd like to catch up with myself, um whether you have a portfolio with me or not, if you just need to sit down and chew the fat because you are facing some anxiety, please pick up the phone, reach out, get some help, get some guidance, get pulled back to what's actually important to you, what your goals are, and making smarter financial decisions to help you get those outcomes. As for this week, that's us.