Among the most valuable lessons I have learned as an investor has been to tune out the “noise”. I define noise primarily as the mass media in general and the financial media in particular. The term “noise” is derived from an academic term to describe anomalies or oddities in a given data set – something that shouldn’t distract from the information the data is telling us. In the world of retail investing (that’s you and me), noise also distracts us from making prudent long term investment decisions.
Professional traders of various financial markets react and make decisions on the news of the day. This is not investing, it’s speculating. Gambling when done poorly. A significant percentage of professionals lose money engaging in this activity and retail investors routinely lose their shirts. It is to be avoided at all costs.
So how does the long-term investor looking to prudently grow their wealth deal with the noise? The first step is to recognize it. You don’t need to read what Wall Street talking heads are recommending or predicting for the upcoming year in order to “properly position your portfolio.” You don’t need their “ten mistakes to avoid this year.” You should ignore the “one stock you need to buy in this economy.” Some of these predictions and advice will no doubt be correct and much of it will be disastrously wrong. The problem is you don’t know which is which without the benefit of hindsight. And those prognosticators that got something right this year will likely be wrong for years to come but rest assured that they will only discuss their one correct call given the chance. There’s an old shell game these people play in our business and it goes like this: make several predictions throughout the year and promote those that proved prescient and ignore the ones you got wrong.
The second step is to acknowledge its place in your life. News has its place certainly and many of us consume it as a part of our daily routine. I check the next day’s weather every evening so I know what to expect. They are right more often that they are wrong. That’s useful to me. I occasionally read to see what’s going on in Washington DC (although less so as I age!) as that has some effect on my life, primarily though specific legislation and taxes. Truthfully, I don’t make any changes to my lifestyle based on this unless my financial planner recommends I do. Finally, I have ceased altogether ingesting financial news other than interesting stories about companies with which I am familiar. In other words, I don’t act on financial news and I ignore any advice this area of the news doles out. They don’t know my personal situation so why would I pay any attention to it? My advisor is responsible for keeping me apprised of those developments that affect me.
The third step is to practice the discipline of ignoring it in relation to your investments. So in order to keep myself from making a poor decision with my money, I “tune out” all media related to personal finance. I stopped reading and watching it over 25 years ago. I have remained fully invested in a globally diversified portfolio, never selling other than to periodically rebalance my holdings. It has served me spectacularly well over this time period. I focus on saving my money. I seek advice on risk and taxes and regularly review my financial plan as my life changes and evolves (grandchildren!).
The final and equally important benefit tuning out the noise has provided me is it has lessened the stress in my life. Something you can’t really appreciate until it’s gone.
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Diversification seeks to reduce volatility by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market.