Investment Noise And How To Deal With It
Market Volatility: It's Best To Ignore The Noise
One of the keys to investment success is to avoid the noise. Investment noise is the constant drumbeat of extraneous information that we’re all subjected to day in and day out. It comes to us via the financial press, the internet and even in the workplace. Ignore this noise and your odds for success increase.
Award-winning Harvard educator and speaker Shawn Achor examines the link between cutting down the flow of irrelevant information and the increased likelihood of reaching a goal. His research provides clarity for long-term investors who are looking for ways to reduce their susceptibility to noise.
Investors would do well for themselves if they were able to reduce the noise. Before reducing noise, it must first be defined. Achor does this by classifying noise into four categories: unusable, untimely, hypothetical and distracting. If information coming into your brain fits any of these four criteria, it’s almost certainly investment noise:
1. Unusable: If your actions or behavior will not be altered by the information coming in, then the information is likely noise. An excellent example is our tendency to obsess about current events and how they might affect our portfolios in the short-term. Will a gas attack in Syria cut oil flow through the Suez Canal and cause a global panic? It’s possible, but not probable. If an event has no effect on your long-term strategy, then ignore the noise.
2. Untimely: If you’re not going to use the information you hear in the near future, and if the story could change by the time you’re ready to use it, the information is noise. Frequently checking the level of the stock market when you’re a long-term mutual fund investor is a noisy habit. The action might end up doing you harm if it changes your behavior – so stop looking.
3. Hypothetical: This is probably the most common type of noise because it’s based on what someone thinks will happen. Listening to expert predictions about the economy and the stock market is almost always noise. Even if a person is right, the information is practically useless. A broken clock is right twice per day.
4. Distracting: Noise is anything that distracts you from your long-term goal.
The information we listen to or look at affects our outlook and ultimately our actions, even if we don’t believe it does. This is dangerous because our brains are wired for negativity. Research says, we listen for bad news three times harder than we listen for good news. This makes it appear that bad news overwhelms good news, which isn’t true in reality.
If we can stop the negative noise, then our lives will be much better. We’re inundated with negative information in our wired world. The news almost always begins with negative stories of murder, war or natural disaster. On the business front, when the stock market declines by 1% the result is many more negative economic stories than positive ones. On a good day in the market, the positive events leading up to the good day are rarely elaborated upon.
Learn to recognize noise, and then learn to tune it out. This leads to better investment results. I can vouch for it from my practical experience. The best performing portfolios in our system belong to those who keep themselves as well as us away from the noise.
