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It’s noisy out there! The ratio of noise to signal is huge, and not being able to separate the two could result in bad decisions in your portfolio. There are two major components of noise that affect investing. One is literal noise, in the case of financial news, and the other is the noise in the markets.
Financial news noise
In the days before cable TV and the internet, stock prices were printed in newspapers. Stock brokerages didn’t have computers to transmit orders automatically and had to write orders on slips of paper that were then run (or sent through pneumatic tubes) to the order cage. The stock exchanges themselves were based on orders on paper too.
In other words, the pace was slower, and market news wasn’t constantly available and in your face.
Now, of course, many news channels run a stock ticker constantly throughout the day, in addition to reports on anything that is unusual, whether it’s meaningful or not.
Since they’re running 24/7, there is a lot of empty airtime to fill, and whether a news tidbit is relevant to anyone’s portfolio, it has to be mentioned so some of that time will be filled up. And if there’s something that seems important — say a 500-point drop in an index — then everyone will harp on it, providing panels and different analysts to explain What It All Means. This is the nature of the business. However, that tends to blow minor issues out of all proportion (a 500-point drop on an index registering 22,000 is not particularly meaningful) and viewers lose the context that might help them address whether it’s relevant to their specific investing purposes.
The availability of airtime also means plenty of space for advertising. People who want to sell you things have known for decades (possibly even centuries) that buyers often don’t make rational decisions and emotion plays a much larger role than many people realize. The two hot button emotions that often lead to purchases are fear and greed. I’ve seen ads that prey on older people’s fear of running out of money (buy this gold for your IRA!) and some that prey on your greed (buy this intrinsically worthless cryptocurrency!)
Just because it’s being sold, and/or screamed about, on TV doesn’t make it a) a good investment or b) a good investment for your particular portfolio. It could be a reasonable purchase for your mom’s portfolio, or conversely for your daughter’s, but that doesn’t make it right for yours.
If something sounds interesting, you can look into it, and ask your advisor about it. But give it some thought before you decide you need to have it.
Stock market noise
The various company stocks represented in the stock market have prices that go up, down and sideways in a manner of seconds. Daily trades are measured in the billions and so there’s a lot of activity.
We’re pattern-seeking creatures and so it’s easy to see patterns in the data where no patterns actually exist, just due to how much data is available. Spurious correlations are easy to find. Nassim Taleb’s excellent book, Fooled by Randomness, explains this in detail.
In any given time period we have no idea how the market will behave. We know over the long term it will return 6–8% over inflation, so what happens in the short term is noise. It’s easy, given our cognitive bias toward patterns and the sheer amount of data points available, to get caught up in the daily activity and miss the long-term trend. Unfortunately this can lead to poor decisions in the portfolio. More-frequent trading incurs costs that eat away at returns, so it’s best to avoid making too many trades.
Tips on avoiding the noise
The less you expose yourself to the noise, the less effect it will have on you. Frankly I think it’s unlikely that you’ll actually get any useful or relevant knowledge from the financial news channels, so you can just turn them off. If you find you can’t, pick a time of day to watch (maybe after the end of the workday, when the markets are closed) for some short period of time so you’ll get the summary of the day’s action and not the minute by minute activity.
Similarly, your portfolio probably doesn’t need to be watched every day, or even every month. It should be rebalanced back to your desired asset allocation once or twice a year.
If you’re having difficulty with the idea of leaving the portfolio alone, you might benefit from having a financial advisor or planner who can guide you and provide you with the perspective that you need. Here’s an article that explains how to find an advisor, depending on what kind of relationship you want to have with them.
Noise pollution is stressful, and particularly in investing, can lead to bad decisions. Minimize your exposure, and not only will your life be less stressful, but your portfolio will thank you.
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