With large single day stock market moves of up to 10% or more earlier this year, some of us may have been asking the question…WHY? It is common for investors to crave simple explanations for stock market movements, perhaps searching for a sense of certainty, in a topic where they are feeling overwhelmed or emotional. In today’s digital world, there is no shortage of financial headlines that aim to view the financial markets in black and white, proclaiming to know where it is headed next, or offer a simple story of what happened yesterday.
The stock market is a system where public companies issue stocks for individual investors to buy and sell. There are millions of investors (with widely different views) who get matched up together… a buyer for every seller. There are many, many reasons why a stock price may rise or fall in any single day, week or month. These may include simple supply and demand issues, investor sentiment, public opinion, mergers, lawsuits, politics, or natural disaster (or a pandemic) as well as computer programs and short-term arbitrage.
Simply put, the intricacies of what can cause the stock market to move on any day are not so simple… or easy to determine.
There is an engineering concept called ‘false precision’, which occurs when data is presented in a way that confidently implies more precise results than justified (that is to say exact numbers are used for inexact ideas). As Tim likes to say…It is better to be approximately right than precisely wrong.
There was an interesting article by Don Pittis on CBC that looked at false precision in financial news, saying “reporters feel they must offer a succinct and simple explanation for something as complex and unknowable as short-term stock market moves”. For reporters to sell their news, there is a need to be emotionally connected to the audience. Investing is emotional, and the ‘simple explanation’ may confirm one’s biases and encourage you to continue consuming the news.
So, what would the media say if it was truly trying to help? The simple explanation would read “Stock Markets plunge by 4 per cent today and while we are not really sure why, analysts have offered several explanations, many of which conflict” … and none of which matter to the long-term investor.
Financial market movements this year have reinforced the importance of working with a financial advisor and sticking to your plan. Your Financial Advisor’s value is highlighted in these times, helping you feel more confident and financially prepared for the long term.
The full article can be found here.
