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Beware of those scary financial headlines

  • Investors need to focus more on long-term goals and less on moving in and out of the market based on news.
  • Hone your goals, your asset allocation tactics and your overall financial plan.
  • Savvy financial advisors do not encourage clients to make impulsive changes.
For long-term investors, daily headlines are distractions.
Westend61 / Josep Rovirosa | Getty Images
For long-term investors, daily headlines are distractions.

"Array of threats stir up markets." "Stocks fall, bonds rally amid Korea, Irma threats and markets wrap." What do these types of news headlines mean to an investor's actual investment decisions?

They're the type of headlines that could encourage people to call their financial advisors for fast action — or if they're enrolled in automated investing programs, to take action themselves and sell stocks in an effort to avoid losing money as stock values slide.

These headlines can often stir emotions that make people want to change their investment strategy. They have the potential to cause a knee-jerk reaction in financial advisors' clients, which could negatively affect their returns over the long run.

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For long-term investors, daily headlines are distractions. History has shown that acting upon market news can be detrimental to a retirement plan. A successful retirement is based upon a well-thought-out financial plan and having the discipline to stay with it — long-term.

This graphic below shows, over a 20-year period, how staying with investments in several different asset classes and different asset allocations performed compared to the average investor. What is striking is that the average investor, over that 20-year period, just barely beat the rate of inflation.

The lesson learned is that investors need to focus on their long-term goals and focus less on moving in and out of the market based on the latest news. If headlines show stocks sliding, here are three steps an investor can take, working along with their financial advisor, to make the best investment decisions for their portfolios.

Revisit why you are investing. What are your goals and investment time frame for the funds invested? Are you investing for a large purchase — such as a new house, funding a child or grandchild's college fund — or investing for retirement? If your time frame is three years or less, consider investing in a more conservative portfolio that consists of short-term bonds or cash equivalents. However, if your time horizon is longer term, a well-diversified portfolio consisting of stocks and bonds may be the right move.

Is your current asset allocation right for you? Your asset allocation should match your risk tolerance. For many investors, the first set when building a portfolio was to take a diversified approach and spread the assets among stocks, bonds, cash equivalents and other specialty assets. However, if your risk tolerance has changed, then maybe it's time to make changes to that portfolio. If your portfolio is well diversified, it may be better to leave it untouched.

What is your overall financial plan? This includes all of your expenses, income sources and investments. Determine if everything is still on track to meet your financial goals. Asset allocation is an important feature of an overall financial plan, and if one goal changes, then you need to consider making changes to how assets are allocated.

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One situation where I do pay attention to the headlines is when the news reports a congressional or legal change that has the potential to affect the performance of a portfolio on a permanent basis. For example, if a headline says, "Congress is eliminating estate taxes," this headline could affect individual portfolios that are constructed with estate objectives in mind.

However, a savvy financial advisor should not encourage clients to make impulsive changes. Instead, advisors should go through the three steps listed above with their clients to determine actions that may best suit their client's portfolios as they work toward their goals.

For the majority of situations, if you don't have a reason to adjust your client's portfolio to reflect a significant change in their financial goals, be wary of the emotions provoked by the headlines and leave your client's portfolio untouched.

— By Brad Kudick, wealth management advisor at U.S. Bancorp Investments

Financial Advisors

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