There can be no doubt that following the movements of one or more markets is important. In volatile trading conditions, the latest stock market news can be vital. However, for the long-term investor this is not always the situation.
The first thing to consider is the type of holdings that you have relative to the news. For example, the correct actions for a passive investor with money in a market fund via a pension will be very different to a private investor holding stock in individual companies.
If you have some holdings in individual companies (direct holdings as opposed to owning units in a fund) then there are several days in the year that should be important to you.
Firstly, any days on which trading statements or annual reports are issued are vitally important. It is at these times that big moves in market valuation can occur.
For example, if your company has just announced excellent or terrible news, you can expect the price to change wildly. Investment funds will be rapidly buying increasing or dumping their holdings in line with the news. This can have a real impact on your net worth - especially if the news is bad.
Such a move can be even more pronounced if it against the trend. A company that has been profitable for years and suddenly slips into losses may be battered by heavy selling causing the price to drop quickly. This new reality would likely start a long-term downward trend in the price. The time to sell may be immediately.
Latest trading statements can also have price impact if there is a new discovery or product being announced. Mining companies that make a find, drug firms that pass clinical trials and any firm with a successful new product launch are likely to see their stock price rise.
Depending on the company in which you have an interest, there may also be much larger forces at play. Modern stock markets use what is known as a weighted index. This means that the largest company (by market capitalisation) represents a very large portion of the index movements whilst the smallest in the index represents much less than 1%.
In practice, this means that the oil price may drop significantly and some of the largest companies in the index fall as well (oil firms are often amongst the largest companies). These falling oil firms might then drag the index downwards, pulling the prices of other major companies (related or unrelated to oil) lower as well. But if your holding is in one of these mega oil firms, the price of crude oil is likely to play a very major factor in the current value of your holdings.
But should these movements be of interest? The world's most successful investor, Warren Buffett, often cites the story of Mr Market by his mentor Ben Graham. Mr Market may be in a good or bad mood for the day and this will impact the prices he is willing to buy or sell at. But the mood swings of Mr Market do not usually represent the trading conditions of the underlying company.
In other words, the latest stock market news may be having a negative effect on the major index and companies for the day, but they are probably still doing business just as they were before and after these exceptional market conditions.
Being able to ignore these occassional anomalies can be difficult for stock market beginners. The 'wily old pros'like Mr Buffett have seen it all before. Not only have they seen these things before, they have learnt their lessons and know whether they should be buying or selling into the market strengths or weaknesses.
As the ultimate example of why stock market news may mean nothing, Warren Buffett has a number of holdings that he terms as 'permanent'. In other words, the underlying business is so strong that he has no intention of EVER selling the shares! He knows the ROI, ROCE, cash flow information and more and deems them to be wonderful long-term investments. And if an investment is wonderful for the long-term, why would you ever sell? Such impeccable logic!
Therefore, it is important to take note of the latest moves and news from your stock exchange, index and companies of choice, but only so far as that news fits in with your long-term investment strategy.
An indirect holding is made as part of a larger fund - usually known as a collective investment fund. This might take the form of a mutual fund, unit trust, life assurance fund or pension fund.
It should go without saying that any such holding should be made as part of a long-term strategy. This would hopefully mean that short-term market movements do not cause a desire to sell.
This would also mean that news relating to individual corporations should not be of much interest. Why worry about one if you own 'the market'?
Such holdings are also usually made on a monthly basis as part of a savings plan. This means that there will hopefully be very limited reason to sell on short-term news unless it is the worst news possible.
Event Driven Strategies
There are some professional investors - many in the hedge fund industry - whose sole aim is to out-trade the markets on breaking news. This army of traders controls what is known as the 'hot money' and they move their vast assets from one place to another at incredible speed to take advantage of price anomalies, momentum or the latest news. They are seeking alpha - to outperform the market and wherever possible, their peers.
It is the job of these traders to interpret the news as it happens and try and figure out instantly who may benefit and who may suffer. This means that they need a lot of background knowledge about markets, sectors and companies so that they can make instant decisions. They do not try and win from all permutations, instead they simply aim to make money on the individual trades.
Clearly, this is a very high-pressure way of earning a living - no matter how large that living may be!