Tuning Out the Noise

Tuning out the Noise

There is always a lot of “noise” out there when it comes to investing and the stock market. Whether its headlines in the news, a conversation with your neighbor, or your wife telling you what she heard from her friend at work, there is always a lot of chatter going on.

Everyone has that friend that loves to tell you about when they go to the casino and win big. But how many times do they ever tell you about the losses they’ve had? Probably not often. This is because everybody loves to tell you about winning. The same goes with investing.

It is always very easy to fall into the trap of listening to it all and trying to ‘outsmart’ the market by market timing. It is important that we block out this noise though, because we need to rely on the data and remove emotion from the equation. When people follow their natural instincts, they tend to apply faulty reasoning to investing.

While at times, it may seem obvious that market valuations are high and that we should try and ‘outguess’ the market, all of the data shows that this is not a good idea and ultimately just takes away from your return. Investors lose an average of 3% per year in returns due to emotionally-driven investment decisions.

If it could be done, people would do it consistently. This is NOT the case. Even with professional managers (people who specialize in trying to outperform their respective benchmarks), there is no evidence that it can be done reliably. In fact, 90% of active portfolio managers are beaten by the index over 15 years. It's not impossible, but it’s like finding a needle in a haystack in doing it consistently.

The rules of investing are a complete 180 degrees from the rules of everyday life. Generally, if you want more of something, you do MORE.

-If you want to be stronger, you lift more weights.

-If you want to be smarter, you read more books.

But being a successful investor is very counterintuitive. In the market, if you want bigger returns, the data shows, it is better to do less.

Think of it like a bar of soap, the more you continue to move it around, and the more you do with it, the less soap you end up with.

STAYING IN YOUR SEAT

The stock market can unexpectedly deliver large returns in short windows of time. Although we like to predict when this will take place, no one knows exactly when these returns are going to take place. No one has a crystal ball. This is much like leaving your seat at a sporting event just before a scoring play. To catch the action, investors must stay in their seat. When we “get out of our seats” and miss out on the big plays (good market returns) it can drastically impact overall performance.

Take this year for instance – in the chart below, you can see the effect it would’ve had over the last 30 years if you missed out on only a few of the best days in the market.

The latest headline or crisis of the day might leave you feeling anxious or nervous. As shown above, reacting to the emotions can hurt performance. I sometimes think it can be helpful to think of it like a roller coaster in times like this. Follow the rules, stay in your seat, and if you don’t give up on your plan, you’re far more likely to have a successful investment experience. Take this year for instance - back in March, the market was down 38% at one point. Now it is up 6%! There are a lot of things that can cause this anxiety during these times of volatility, especially because of the headlines. The ups and downs come, but you keep moving forward. In the moment, it always seems like a major deal, but history shows that it will pass.  It’s a good exercise to look back and remind yourself what the crisis was 1, 3 or 5 years ago. Rarely, people can even list it off. Yet, in the moment, it seems as if it’s the biggest deal in the world and can get people pretty charged up. (US debt downgrade, Brexit, China tariffs) But if you look at what took place in the markets over the last 10 years, it has been a very good run.

People do not check the price of their house every day. Not even monthly or yearly for that matter. Why? Because they’re not going to sell it since they know they will be in it for a long time.

You know you’re not going to sell your portfolio every day. For that matter, you are probably not going to sell it monthly, or even on annual basis. So why check it routinely and overreact? If you are investing in short-term returns, that is essentially the same as gambling. A disciplined investor looks beyond the concerns of today to the long-term growth potential of markets.

When you try and time the market, you have to make two right decisions, when to get in, and when to get out. And you have to consistently get it right. OVER and OVER again. Suppose you’re even able to guess right on market timing 70% of the time. Since you must do that a second time when getting back into the market, your odds are now less than 50% of getting them both right.

The positive news is that investors don’t need to be able to time markets to have a good investment experience. Over time, capital markets have rewarded investors who have taken a long-term approach and have remained disciplined in times of market volatility. It is most important for investors to focus on the things they can control (like having an appropriate asset allocation, diversification, and managing expenses, turnover, and taxes).

KEY TAKEAWAYS

-Remove emotions from investments

-Rely on the data

-Have a long-term mindset

-Tune out the noise