Published June 2002

Be careful choosing investments on ‘latest news’

Some investors constantly keep one eye on the “news of the day” to see how it may affect their stocks, bonds and other holdings. And, to be sure, some events do influence the performance of investments in the short term. But if you’re going to invest successfully over time, it’s important to look beyond today’s headlines.

Part of the problem with making investment decisions based on current news events is that the market reacts to a wide variety of developments — earnings shortfalls, political instability, the Fed, etc. You can’t predict such events, and you can’t always tell how they will affect your investments, either.

This element of unpredictability is compounded by the fact that the market doesn’t just react to news; it often overreacts. Bad news moves it down, while good news moves it up, and these swings are sometimes driven more by emotion than by logic. You’ve probably heard that “greed and fear drive the market.’’ Unfortunately, there seems to be some truth to that theory.

Instead of relying on today’s headlines to guide your investment decisions, you’re much better off choosing investments based on more meaningful factors. If you’re considering a stock, examine the fundamentals of the company. Is its management stable and experienced? Are its products competitive? Does it have a sound business strategy?

You also need to ask yourself if a particular investment will be a good fit for your diversified portfolio.

Suppose, for example, that you’ve found a growth stock that you like. You’ve done your research, you understand the company, you’re impressed by its management and you’re convinced its fundamentals are strong and its outlook is bright. Sounds like a great stock to buy, right? Maybe — and maybe not.

If your portfolio is already strongly weighted toward growth stocks, then the addition of one more, even one that looks quite promising, could throw your portfolio out of balance and subject you to even more investment risk.

If you concentrate on a stock’s fundamentals and its appropriateness in your portfolio, and if you can maintain your long-term focus, then you’re far less likely to be swayed into making investment moves that spring from whatever news events are currently making headlines.

Still, you won’t want to ignore all the news. If you see a pattern of stories that indicates a particular industry or company is heading into a long-term downward spiral, then you may want to review your holdings. Just make sure you’re not responding to what may be a one-time or short-term event.

There’s an old saying that “today’s newspaper is tomorrow’s trash.’’ If you can keep those words in mind, you’ll probably be a happier — and more successful — investor.

Eric Cumley is an Investment Representative with Edward Jones Investments at 1201-C SE Everett Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 7,000 locations nationwide.

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