Rick Ferri | September 18, 2013
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.
In his latest book, Before Happiness, 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.
I believe in long-term investing using low-cost index funds. This is a lifetime investment strategy rather than one that looks out over one week or one year. Nonetheless, even index investors can make an error when being constantly bombarded by noise. Whether it is the latest rumor on Federal Reserve “tapering” or Jim Cramer screaming on the television, investment noise has the potential to wreak havoc on a well-managed index fund portfolio.
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 index 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. Believing that new ETFs that follow so-called “intelligent indexes” or have “smart beta” have a high chance of earning a high return is noise. Jim Cramer screaming at us so loudly that we don’t dare disagree with him doesn’t make his advice any better than average. Loud noise isn’t better noise.
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. According to Achor, 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.
Achor believes that if we can stop 5% of the negative noise, then our lives will be much better. He has some helpful tips how to do this. Here is a short list based on those ideas:
- Leave the radio off for the first five minutes after getting into a car.
- Turn the radio off when talking with someone in a car.
- Lower car radio volume or mute during commercials.
- Mute the TV and internet during commercials.
- Remove news media links from your bookmark tool bar (less news is good news).
- Limit watching financial entertainment shows that make predictions (Bloomberg, CNBC).
- Don’t read about tragedies in the news, because they can affect your outlook.
We’re inundated with negative information in our wired world. The 6 o’clock and 11 o’clock 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.
Successful investors begin with a realistic plan for achieving a truthful goal. Then the plan must be implemented and maintained in a cost-effective way. The final step is to stay the course, in part by ignoring the noise. Learn to recognize noise, and then learn to tune it out. This leads to better investment results. {end}