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The Reformed Broker

A healthy dose of skepticism

Financial news can be fraught with superflous news that seeks to explain random events, Brown argues. Savvy investors should read everything with skepticism and remember to pay attention to historical context when they're trying to analyze what the market is doing.

By Guest blogger / June 17, 2013

Traders work on the floor of the New York Stock Exchange, NYSE, on April 11, 2013 in New York, New York. Although it is easy to get caught up in minor details when you're watching the stock market, Brown advises trying not to constantly search for explanations of random events.

Melanie Stetson Freeman/The Christian Science Monitor/File

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Morgan Housel (Motley Fool) does an excellent job here reminding us of how much superfluous news is created each day:

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Joshua has been managing money for high net worth clients, charitable foundations, corporations and retirement plans for more than a decade.

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Avoid explanations of random events. Pay more attention to historical context.
People can't stand the idea that events are random and unexplainable, so they try to attach meaning. You'll see things like, "Stocks fall 0.5% as investors react to manufacturing data" rather than the more honest, "Stocks fall 0.5% because they just do that sometimes."

Instead of reading explanations of what the market is doing, pay attention to what the market is doing in a historical context. The next time stocks have a down day, remember that they do that, on average, every other day. The next time stocks decline 10% from a recent high, remember that they've done that almost every year since the Civil War. And the next time we have a recession, remember that no one in history has made it to the 5th grade without living through at least one recession.

Trying to explain market moves gives us the impression that we can predict the future, which we can't. Looking at market moves in historical context reminds us to ignore the noise, which we can.

What he doesn't mention is that the reason financial journalists and media producers do this is because its what people think they want. They see the market go up or down or both in the course of the day and they want an explanation for it that is logical enough to satisfy the part of their brain that searches for answers.

And the media is happy to give this to them because ads can be run alongside it.

If investors weren't constantly in search of explanations, this wouldn't go on and on the way it does. But they are so it continues. Your job is to be aware that fluctuations do not require ex post facto answers and to take the whole shooting match with a big helping of skepticism.

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here.To add or view a comment on a guest blog, please go to the blogger's own site by clicking on www.thereformedbroker.com.

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