Investment Noise: Know It and Forget It
There’s a simple strategy for being a successful investor – tune out the investment noise. The noise that we’re bombarded with daily, from the talking heads on television and radio, to the printed press. The noise that is perfectly exemplified in the video clip above.
I’ll never forget watching that whole thing play out. Jon Stewart wasn’t the only one to come down hard on Jim Cramer – he got flack for his Bear Stearns praises right before their collapse from all sides. But again, he was just creating noise, creating hype in an already tense time, not unlike many of his media counterparts.
The Noise is Never-ending
This isn’t meant to pick on Cramer. He’s just the lucky example that I remembered when sitting down to write this article. The truth is, investment noise is endless.
Look at what took place in the last few weeks – the Dow saw its biggest drop since mid-May over the growing tension with North Korea. International markets in Asia and Europe followed suit. After these reports surfaced in the media, the VIX, a volatility index widely used to gauge market fear, soared by 44% – its highest level since Trump was elected. That’s how big of an effect investment noise can have on our sense of well-being.
It seems there’s more noise than ever right now. Noise about foreign affairs. Noise about politics. Noise about noise. There is no shortage of pundits attempting to explain how all of this swirling mayhem will impact the market and your investments.
All this noise is irrelevant to long-term investors. Since we use lifetime strategies, the noise of the day makes no impact on our investment decisions. However, even the best investors can easily get spooked by investment noise overload.
That’s because what we read and listen to ultimately affects our actions. According to a study from Pew Research, we listen for bad news almost three times more than we listen for good news. This negativity bias makes it appear that bad news overwhelms good news, even if that’s not the case in reality.
In reality, a 1% drop in the stock market is normal – even to be expected. But when it happens, the stories in the media are all negative, full of gloom and doom. The positive rebounds that follow rarely get as much attention.
Investment Noise: Know It and Know How to Forget It
For you to find true investing success, you have to know investment noise when you hear it, and be able to forget it just as fast.
Shawn Achor, Harvard educator and New York Times bestselling author, has become one of the leading experts on the connection between happiness and success. His 2013 book, Before Happiness, has a key focus on noise-canceling strategies. Achor used this strategy to explore the link between tuning out irrelevant information (noise), and how this increased the likelihood of you reaching your goal.
So, if reaching your full financial potential is at the top of your list, tuning out investment noise is going to play a critical role in reaching that goal.
Achor even defines what noise is, and classifies it into these four categories:
1. Unusable. Information is likely to be noise if your behavior will not be altered by it. For instance, look at our human tendency to obsess over current events and the short-term effect it may have on your portfolio. If the event in question has no effect on your long-term strategy, then you need to ignore the noise.
2. Untimely. I can’t stress this enough – by the time you hear about it, it’s too late. You’ve missed your window of opportunity to capitalize on the market movement. Frequently engaging in stock picking or market timing will almost always cause you more harm than good. If the story could change tomorrow, it’s noise.
3. Hypothetical. This is the most popular type of investment noise. Everything you hear in the media is based on what someone thinks will happen. Listening to expert predictions and market gurus is noise 99% of the time. That’s because it’s all hypothetical until it actually happens.
4. Distracting. An easy way to tell if something is noise is if it distracts you from your long-term goals. Changing your investment allocation based on which hot stock the talking heads are endorsing today is not a long-term strategy for success. Heck, it’s not a strategy at all – it’s simply a distraction.
Why Does it Matter to You?
Successful investors don’t let noise dictate their actions. Instead, successful investing begins with a real plan. We believe that plan should be rules-based, and built on your values. This helps remove emotion and subjectivity, and provides a policy by which you can make better investment decisions. Not only that, but our strategies are designed to mitigate market volatility, which makes for a smoother investment ride. This is key in reducing your vulnerability to investment noise.
Stay the course, recognize and tune out the noise, and you will have better investing results for it.