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What to Do About [Recent Economic Event]

One of the most common types of emails I receive is the email asking what to do about a particular economic event in the news (e.g, various actions by the Federal Reserve or, more recently, the Detroit bankruptcy).

My training in economics consists of precisely four undergrad courses, so I have no insights about macroeconomics that your next-door neighbor doesn’t have. And it would be downright silly for me to think that I’d somehow be able to read about a piece of economic news, foresee some consequence that the market cannot foresee, and be able to recommend a portfolio adjustment that will offer market-beating results. And frankly, I think most investors are in a similar situation.

So unless there is an obvious way in which you will be directly impacted (e.g, the news in question is the Detroit bankruptcy and you are a retiree with a Detroit city pension), I don’t see a great deal of benefit* to spending much time thinking about these things, especially not when there are so many other things that you could spend time and energy on that would have a higher probability of improving your finances (without requiring you to predict stock or bond market movements). Things like:

  • Reducing the costs of your investments,
  • Making sure your portfolio is sufficiently diversified,
  • Making sure the level of risk in your portfolio does not exceed your risk tolerance,
  • Protecting yourself against behavioral investing mistakes,
  • Tax planning,
  • Social Security planning, or
  • Making efforts to increase your earnings potential.

At a broader level, that’s the fundamental problem with most efforts to outperform a simple passive investment strategy. To be worthwhile, they not only have to have a greater than 50% likelihood of success, they have to have a greater expected payoff than the payoff you would likely get from spending a comparable amount of time/energy/money on the above list of objectives.

*Personal finance-related benefit, that is. Staying up to date on economic news can of course be worthwhile for other reasons (e.g., to be a well-informed voter). Just don’t expect it to help your portfolio in any meaningful way.

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