It’s a big deal. Microsoft is paying nearly $7.2 billion in cash for Nokia, the Finnish mobile phone company, acquiring 32,000 employees and a CEO who’s a possible successor to current Microsoft chief Steve Ballmer.
The Wall Street Journal called the acquisition a “blockbuster”; the New York Times termed it “audacious,” and Ballmer himself was quoted as saying this was “a bold step” into Microsoft’s future.
So what should a smart investor do with big news like this?
In most cases, nada.
The trouble for many people in the face of big news is that there’s an almost irresistible temptation to do…something: buy, sell, reallocate, call your broker (to say you called her, if nothing else). Headline events—whether a hurricane, election, war or corporate merger—make us restless, itchy for action. Is there a way to profit? Avoid a loss?
When you want to jump on a stock (Nokia’s up!), that’s sometimes called “attention-driven buying”: you’re reacting to what some researchers call “attention-grabbing events” that make you believe you should invest your money there, now.
It’s almost like a successful ad campaign. Headlines and gabby commentators can help spotlight a company, trend or stock—so it’s momentarily elevated out of thousands of others. Rather than sort through those, it’s easier to buy whatever grabs your attention.
But trading on headlines is likely to line the wallets of brokerages, not you. Short-term trading amounts to placing bets, often against large hedge funds and institutional players, which are better positioned to take advantage of short-term moves. Individual investors are much more susceptible to “attention trading” than professionals, according to a 2006 study by behavioral finance researchers Brad Barber and Terry Odean.
To make the wisest choices for your money, “it helps to identify yourself as an investor, not a trader,” says Betterment behavioral finance expert Dan Egan. A trader is looking for a profit, and usually a quick one, and as a result is always reacting to news. An investor isn’t caught making knee-jerk reactions which don’t affect long-term results.
The better way to invest
As Dan pointed out in a recent post on the value of doing nothing, the human impulse to react affects us all—even soccer players—and it’s not always a smart idea. Goalies actually prevent more goals from being scored when they stay still, it turns out—but they move around, tracking the balls, under the conviction that they’re doing the right thing.
An investor takes the longer view, and at Betterment we’re all about helping you become a better investor. The less you do, the more you gain—in both money, time, peace of mind.
Market fluctuations are frequent; companies’s fortunes rise and fall. Rather than focusing on what’s in the news, keep your eyes on the horizon. They say it keeps you from getting motion sick when seas are stormy.