What is noise?
Noise is any information that does not help you make better investment decisions. It can come in many forms, including:
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Media commentary: Media commentators and investment analysts often predict economic trends that have no proven link to the direction of the stock market.
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Expert opinion: Economists are notoriously bad at predicting recessions, and even when they are right, their predictions have little practical value for investors.
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Your own emotions: It is easy to get caught up in the excitement of the market, or to panic when the market takes a downturn.
Our investment success, our discipline, does not require that we make forecasts, or guess, or listen to “expert opinion”, whether they are an influential name in the media or a big-name fund manager.
Have you noticed that media commentators and investment analysts typically don’t analyse markets, but predict economic trends which more often than not have no proven causal link to the direction of the stock market?
The problem is that the existence of the avalanche prone snowy slope, our analogy for the extremely vulnerable US stock market, has been very prolonged. So, they have to find something else plausible to say. Bright commentators and analysts, whose livings depend on coming up with something intelligent to say a few times a week, don’t disappoint.
In particular they cling on to a story, a narrative, as long as they can. Then they out-gloom each other on this narrative – a “nothing to see here” headline does not sell newspapers. We covered this in “Complex world, simple rules”:
“The most common investor mistake is to analyse a single component, like inflation, and use it to explain the entire system. This kind of analysis is not just unhelpful but also dangerous, as we develop a naive understanding of cause and effect, and are particularly caught out at big turning points.”
From your perspective as an investor, such narratives are almost always noise - some pointlessly trying to identify the final snowflake which will bring the edifice tumbling down, others contrive economic analysis which typically has no causal link to the stock market direction.
Are you sure you are not listening to too much “expert opinion”? We know economists are shocking at predictions. And that what they tend to predict (e.g. recessions), they are not only very bad at predicting, but, even if they could, it has no practical value for your investing. Of course, major recessions are another matter, but no economists ever predict these uniquely important types of recession.
How to reduce noise
Noise reduction was key to me culling my FT subscription back in 2019. It simply doesn’t provide any critical facts I need to succeed as an investor.
Do you have a messy eclectic collection of investments?
Do you obsessively twitch at every news alert on your phone?
Try separating out the wallpaper from the critical facts you need for your investing success. Don’t get distracted by the latest missive from the FT or your broker (or even us) – we are just wallpaper.
You already have the small number of critical facts you need to transform your investing potential. Focus on those and it will be easy to tidy your investments into a coherent whole, and substantially increase the long-term potential of your investing efforts – and then you can read more widely just for fun.
Additional tips to help reduce noise in your investment decisions:
- Focus on your investment goals: What are you saving for? Retirement? A child's education? Once you know your goals, you can start to make decisions about how to invest your money.
- Understand your risk tolerance: How much risk are you comfortable taking with your investments? If you're saving for retirement, you may be able to take on more risk than if you're saving for a short-term goal like a deposit for a house.
- Don’t just focus on the fees associated with your investments: Fees can eat away at your returns, but if you are invested well, it isn’t as important focusing on fees when choosing investments.
- Don't panic: The market will go up and down. It is important to stay calm and not panic when the market takes a downturn. Remember, have a clear process and stick to it.