How to kick your addiction to financial porn

Financial porn can do real damage to your portfolio. Here's how to protect yourself.

Financial porn is everywhere – it’s all the news and advice designed to excite investors and to keep them reading. ‘Click bait’ as they say.

The easiest way to spot financial porn by its use of hyped language. When a stock dips 5%, it's in free-fall. When things aren’t running absolutely perfectly, it’s labelled a crisis. And when the outlook is promising, financial pornstars will play to your greed – ‘the next Apple’, ‘explosive growth’, or ‘the company is expanding into China which has a population of a bazillion’.

But so what? A little hyperbole isn’t hurting anyone – right?

Unfortunately, the exciting language of financial porn usually encourages risky behaviour and a short-term mindset. It steers you towards lottery ticket stocks which may have potential but where the odds of a payoff are very low. And it promotes active trading, which clocks up fees that eat into your return.

Worse still, financial porn is usually pitched as being ‘for serious investors only’. It’s natural that we want to stay up-to-date with our investments, but financial porn plays on our innate information bias – our tendency to believe that the more information we acquire, the better our decision will be, even if the additional information is irrelevant. This leads to overconfidence and even more risky behaviour.

Five ways to kick the addiction

1. Tune out the noise: Turn off the TV and radio when the financial news comes on. If you’re investing for the next 10 or 20 years, what happened in the markets today probably doesn’t matter.

2. Take your time: Feeling that you need to act on advice immediately is a big red flag. Making buy and sell decisions when emotional is almost never a good idea, so sleep on it for a few days then see if you still feel it’s a ‘once in a lifetime opportunity’. When in doubt, do nothing.

3. Ask ‘is it too good to be true?’: If someone offers you returns of 15% a year – or even half that –  and it’s ‘risk free’, you can block your ears. You’re not missing out. When promised quick profits, respond with a quick ‘no’, as Warren Buffett says.

4. Focus on fundamentals: Commentary that uses hyped language or emphasises a stock’s price movement – rather than the company’s financial and competitive position – is rarely worth your time. What matters is where the current share price stands relative to the company’s intrinsic value. That’s it.

5. Recognise that panics are often the best time to buy: If you feel yourself getting swept up in the media hype, remind yourself that the stock market will always bounce around in the short term. Over very long periods, however, equities are among the best performing assets. If you stick to buying high-quality companies when they’re undervalued, you’ll do well.    

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