Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law
The second reason to consider breaking news irrelevant to your investing is what we’ll call “The Barn Door Principle.” By the time you hear the news, the market already has incorporated it into existing prices, well ahead of your ability to do anything about it. The proverbial horses have already galloped past your open trading door.
This is especially so in today’s micro-second electronic trading world. In his article, “The Impact of News Events on Market Prices,” CBS MoneyWatch columnist Larry Swedroe explored how fast global markets respond to breaking news. Pointing to evidence from a number of studies among several developed markets, he found that the universal response was nearly instantaneous price-setting during the first handful of post-announcement trades. In the U.S. markets, it was even faster than that.
In other words, unless you happen be among the very first to respond to breaking news (competing, mind you, against automated traders who often respond in fractions of milliseconds), you’re setting yourself up to buy higher or sell lower than those who already have set new prices based on the news. And that, of course, is exactly the opposite of your goal.
It makes little sense, then, to play an expensive game based on ever-changing information and cutthroat competition over which you have no control. A better way to invest is by paying heed to a number of market factors that you can better expect to manage in your favor. We’ll introduce these factors to you in a future blog.
But first, you may be wondering: Even if you aren’t personally up to the challenge of competing against the market, perhaps there’s a pinch-hitting expert out there who can do it for you. In our next blog, we’ll explore whether that’s the case.
Read more at alignmywealth.com/blog.html
Brian Puckett | JD, CPA, PFS, CFP®
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