“As hard as it may be to do so, smart investors know that the key to success is ignoring the daily noise of the markets.” – Larry Swedroe
It’s easy to say that we should ignore the noise and not pay attention to the market in the short-term. This is a great piece of advice, but it doesn’t make our ingrained psychological and behavioral issues any easier to deal with.
The flow of information today makes it easy to find any piece of news or research any time we want it. Information overload can be like trying to drink straight from a fire hose. It can be overwhelming.
What investors really need is a process that helps reduce the noise to a level that keeps them safe from making irrational decisions.
Here are some questions that investors grapple with on a consistent basis:
- Should I save and invest more now or wait until I feel better about the economy or the political environment?
- Should I sell all of my stocks to try to avoid a possible correction in the market?
- I’m afraid the market and/or interest rates are going to move up/down soon so how should I proceed?
- What level of risk or what size of loss am I comfortable taking?
There are a couple of ways to come up with a process to deal with the inherent uncertainties in the financial markets. First, ask yourself these 3 basic questions:
(1) How will my portfolio be affected by the time I need to spend my investment dollars if I do go through with this decision?
(2) How will my portfolio be affected by the time I need to spend my investment dollars if I do not go through with this decision?
(3) Will making this decision alter my long-term process and do I have a legitimate reason for making a change to my investment plan?
Short-term noise in the market will make you want to take action with your investments. The majority of the time, answering these simple questions will help guide your decision to take absolutely no action.
Here are some other ways to ignore or reduce the noise in the market:
Wait a week or 10 days to take any action. Give yourself a buffer to make big decisions with your investments. You can’t predict what’s going to happen with the markets in the next 10 days anyways. This will give you time to think things through before you make any big changes.
Seek out alternative opinions. Metacognition (big word I just learned) means that the less competent you are at a task, the more likely you are to over-estimate your ability to accomplish it. Actually having competence in a given field reduces self-confidence. Knowing your limitations and admitting that you could be wrong or don’t know what’s going to happen next can help reign in the overconfidence in your investing abilities. This is very important when markets are rising and investors mistake luck for skill.
Be selective with your sources of information. Seek out a number of different opinions, but don’t necessarily act on all of that information, especially right away. If you find what you think is a credible source (and it most likely will not be on a 24 hour financial news station), follow them for a while. Make sure you aren’t confusing your source’s risk profile and time horizon for your own. There’s no one-stop-shop for all of the advice you need. Feel free to window shop, but do your homework.
Ask for help. Find someone in your life that you can bounce ideas off of. It’s much easier to see mistakes in other people’s actions than it is in our own. Look for honest and trustworthy people that will tell you how it is. That way, if you go against their advice, they can call you out on it so you can learn from your mistakes.
Write it down. Once a year, look back on your investment decisions and make a list of the good and bad moves that you’ve made. You can check back on this list every time you feel the need to make a big move. Everyone makes mistakes, but the best investors learn learn from them over time and don’t make the same ones twice.
Don’t Look and Do Nothing. The more often you check the market value of your portfolio or watch the daily movements of the markets, the more you will feel like you have to make a move. It’s easy to be swayed when markets and stocks are moving at a breakneck pace. If you only looked at your investment balances on a quarterly basis, you could save yourself plenty of unneeded stress.
This is probably the best move 9 out of 10 times. Inaction can be a wonderful thing within a well-defined, rules-based investment plan. John Bogle has a really good take this:
“This is one of the most important rules of investing. If you never peek from the age of 20 to the age of 70, you’ll rip that first 401(k) statement open at age 70, and I recommend you have a doctor on hand because you’ll go into a dead faint. Your heart might even stop. You’re going to have an amount of money you can’t even imagine.”
Metacognition and the MBA Student (Big Picture)
This man will make you rich (Ask Men)
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