Speculation in the Financial World

Jul 2016


For the past 10 days or so, the talk in the financial world has been about the British people’s decision to leave the European Union (Brexit). There has been an incredible amount of speculation as to what is coming next. If you listen to 25 of the so-called experts they’ll have 30 different opinions. In addition, their opinions at nine in the morning may be totally different than at four in the afternoon. The bottom line – we are entering unchartered waters and despite all the expert opinions, no one knows how this will play out.

Although we are in unchartered waters, it’s not like we haven’t been in unchartered waters in the recent past. An example is a few years ago when the United States lost its AAA credit rating. There were all sorts of wild speculations as to what would happen to interest rates and the economy as a whole. In these types of situations, generally the doom and gloomers dominate the conversation. The doom and gloomers speculated that the loss of the U.S. credit rating would cause a recession, a crash in our markets and soaring interest rates. Not surprisingly, none of this came true.

A few years ago when the children in Washington couldn’t play together, our elected representatives came up with something called sequestration and once again we were entering uncharted waters. As always, when this downgrade occurred, the doom and gloomers dominated the conversation once again. At the time the financial media was full of endless speculation as to how this downgrade would adversely affect the U.S. economy. Not surprisingly, once again, the doom and gloomers were wrong.

In today’s 24-hour news cycle, in order to drive ratings, it seems the more you can put things in crisis mode, the more air time you get. As a result, whenever we have an event that is unprecedented such as the Brexit or the lowering of the U.S. debt rating or sequestration, the doom and gloomers seem to come out of the woodwork and dominate the airways. Unfortunately, the fact that these doom and gloomers are never right does not seem to be important. What seems to be important is that they scare people and they sound good doing it.

As I’ve said many times before, being an investor is not easy. It takes a fair amount of discipline to ignore the endless speculation. However, that is what you have to do. You have to realize that all too often the purpose of the talking heads is not to educate you or help you make better investment decisions but rather, to drive ratings.

I admit I don’t know how the Brexit is going to play out and in reality neither does anyone else. To speculate and make radical moves in your portfolio is akin to gambling. There’s nothing wrong with gambling; however, you don’t want to do it with your investment dollars. I believe the patient investor who has the discipline to ignore the chatter and the doom and gloom talk will be a successful investor in the long run. Investors who gamble may get lucky once or twice, but in the long run, they’re not going to be successful. After all, they don’t build those big beautiful casinos because gamblers make money.

Good luck!
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.