People pay far too much attention to their performance on a daily, weekly, or monthly basis. Unfortunately, that’s a mistake. Even looking on a quarterly or yearly basis is fundamentally flawed.
Imagine someone running a marathon and the announcer telling you how far they have gone after one second. It’s irrelevant. Nothing that happens in that first second is going to give you any meaningful information unless that person drops dead in the first second.
Most people understand the first second of a race isn’t going to have any bearing on how the race looks later.
Unfortunately, it’s the same for investing, but people treat that first second like it has meaning anyway.
People treat that first second like it’s the most important second on the planet. They will tell you about the people in the crowd, the wind speed, what the weather could look like later in the race, speculate on who pulls ahead first, discuss who has been winning races recently, their training regime, the types of clothes they wear, how they have never lost in a year where oil prices have risen, and the list continues.
Instead, you hear people talk about how the Federal Reserve is manipulating the economy (by the way, that’s their job – literally what they get paid to do). It’s like complaining that a surgeon saved your life because they successfully did an appendectomy. I digress. People talk about how stock prices are elevated, interest rates have to go up because they are low, inflation is going to be higher because it spiked last month and a ton of money has been created, Amazon is taking over the world and their stock must go up because of it, it’s been more than seven years since a recession and one must happen, or commercial real estate will do poorly because of a pandemic.
I could write an entire book about prognostication and how it’s not meaningful or helpful – it’s noise.
Today, I’m going to help you identify noise in investing and talk about ways to avoid it.
How to Identify Noise Investing
There are a few different frameworks to identify noise when investing.
If someone says anything related to the list below, there are good odds it is noise.
- If X happens, Y is going to happen.
- Insert famous person with impressive credentials said to do XYZ or said XYZ is going to happen.
- If it is widely publicized on the news.
- It came from anyone not willing to share their past prognostications and accuracy.
- You ask yourself, “Will this matter in 30 years?” and the answer is no.
Let’s break down each one further.
If X Happens, Y is going to happen.
This is the biggest fallacy. If the Federal Reserve prints money, inflation must go up. If Biden wins, taxes will go up. If we go to war, the stock market will crash.
The world does not work this way. The world does not operate in a vacuum with only two variables. Look around wherever you are right now. What do you see? The outcome of everything around you is unknowable and could be impacted by anything else around you. One small change could impact everything else.
Consider the Butterfly effect. Although it’s been talked about in the context of a butterfly flapping its wings and thousands of miles away starting a tornado, Edward Lorenz, the meteorologist who developed the concept never intended it to be received that way.
Instead, according to American Scientist, “the purpose of his provocative question, he said, was to illustrate the idea that some complex dynamical systems exhibit unpredictable behaviors such that small variances in the initial conditions could have profound and widely divergent effects on the system’s outcomes. Because of the sensitivity of these systems, outcomes are unpredictable.”
It’s critical to remember we live in a complex, dynamic world. One small change could have widely divergent effects. It’s not If X Happens, Y is going to happen. Trust me, if people could predict like that, they wouldn’t be telling you about it.
Insert famous person with impressive credentials said to do XYZ or said XYZ is going to happen.
A famous person with impressive credentials does not know you. They don’t know your situation. They don’t know what is going to happen. See rule number one if you already forgot it!
A famous person with impressive credentials probably is ultra-wealthy. They can take different risks than you. If I had a billion dollars, my advice for someone with a billion dollars would look much different than my advice for someone with $100,000.
Just because someone else is saying to do something, does not mean you need to do it. Your mom had it right when she asked you as a kid, “If Johnny jumped off a bridge, would you follow him?”
Only in this context, the suggestion is going to sound brilliant because Johnny is wealthy or went to a fancy school or was successful.
Again, you should not be taking blanket advice from someone who knows nothing about you. It’s like asking a doctor to cure you without ever taking a medical history or examining you.
If it is widely publicized on the news.
The news is the definition of short-term. They have a business where they need to talk 24/7. Their livelihood depends on it.
If it is already on the news, markets have already reacted to it. Something has to change from this point forward for things to be different.
The news is meant to create fear to get you to tune into it for longer and more frequently. There is no point worrying about something that already happened that already impacted your portfolio. The events that really drive markets are the unforeseen ones – the Great Depression, 9/11, the Tech Bubble, Global Financial Crisis, and COVID-19.
The market reacted to those events before they were big stories on the news.
If you are hearing about events on the news, it’s likely noise and can be ignored.
Do you have a buddy who always seems to be making money? Perhaps you subscribe to a newsletter touting how much money they are making subscribers? Maybe you’ve heard of a mutual fund manager who is up 50% this year?
If you put enough people in a room, by sheer luck, someone is going to be right. The problem is that identifying whether it was skill or luck is nearly impossible and even more challenging to identify it in advance.
The example I like best is a stadium filled with people flipping a coin. Each toss has a 50% chance of landing on heads. Imagine 50,000 people in a stadium and in the first round, everybody who flips a coin that lands on tails sits down. Then, they repeat it. Each time, anybody who flips tails sits down. Even after 14 rounds, about three people would still be standing.
Are they skilled?
No, there is still a 50% chance each time they flip a coin. They got lucky.
How could you have identified those exact three people out of 50,000 in advance? You couldn’t.
It’s easy to claim success on the internet. There is no scoreboard of someone’s past history. There is no database showing how someone has been making the same call for the last decade only to finally be right once. Unlike most industries, you only need to be right once in the investment industry to garner an overwhelming level of followers and success.
Imagine being a doctor who kills every single patient for a decade only to save one person and is glorified for the one save.
That’s exactly what the investment industry does.
If you can look like a hero, particularly during a market downturn, you usually only need to be right once to attract money. As you can imagine, that same person is usually not right twice and subsequent returns lag.
What’s the lesson? Be skeptical of anybody claiming to have great success. I’ve rarely met a person who is equally as honest about their mistakes and misfortunes as they are about their successes and wins.
You ask yourself, “Will this matter in 30 years?” and the answer is no.
This is a slippery slope because most people take the present and forecast it into the future, assuming it will be similar. They put too much weight on what has happened recently.
But, imagine the world thirty years ago. The Internet wasn’t what it is today. The world was not at our fingertips in a cell phone. Self-driving cars were nothing more than a dream.
Most of what happens on a day-to-day basis is noise. Most of it won’t heavily influence life 30 years from now.
Whenever someone mentions they are worried about something, I look at it through the lens of, “Will this matter in 30 years?”
Interest rates went up. Will this matter in 30 years? Probably not.
We entered a new war. Will this matter in 30 years? For the world, yes. For investment portfolios, it’s unlikely. There will be enough growth and a reversion to average returns that the war will also be a blip for someone’s investing timeframe.
A ship is blocking a major shipping canal. Will this matter in 30 years? No.
Inflation went up 6% in a month because everybody wants to travel and a global pandemic caused chip shortages. Will this matter in 30 years? No, even the high inflation of the past has little bearing on portfolios today.
You may be wondering, what will matter in 30 years for an investment portfolio?
I’m not sure.
I’m not confident enough to say say nothing will matter. Surely, there is something that could, but my speculative brain says if it is bad enough to impact a portfolio 30 years later, I will likely have more grave concerns than my investment portfolio because something really went wrong in the world.
Most of us are best served by brushing off the concerns of today, at least in the way that they impact an investment portfolio. It’s best to have a plan and follow that plan throughout time.
How to Avoid Short-Term Noise When Investing
Now, you can identify short-term noise when investing. The question becomes, what can you do about it? How can you avoid it?
There is no foolproof way. There will be times throughout your investing timeframe that you are tempted to make decisions based on short-term noise. The key is to minimize how often you do it and how much you put at risk when doing it. Having a plan in advance is critical.
I’ve found a few strategies that work best:
- Watch less news
- Read about history
- Go for walks
- Exercise regularly
- Surround yourself with positive people who also do the things above
Notice how none of it is related to investments?
There is a reason for that – it’s good to unplug from the noise of investing.
Watch Less News
Reading news is a different experience than watching the news. When you read the news, it’s static. Text on a page. This is different from watching the news, with concerned broadcaster faces, “BREAKING NEWS” sprawled across the screen, scary red colors pasted everywhere, and fast-paced musical bits to keep your eyes glued to the screen.
It’s toxic. I get stressed watching the news.
Avoid it or minimize it to the extent you can.
There will always be something new happening in the world, but there is a good chance something similar happened in the past. War? Check. Pandemic? Yes. Interest rates up? You bet. Interest rates down? Of course. Fraud? Always. Hurricane disasters? Yup. Material shortages? Nothing new.
You name it – it probably happened.
Read About History
If you understand something has happened before and the world has continued on, there is a better chance you can avoid the noise today.
Anecdotally, I’ve found people in their 20s and 30s often don’t know enough to be concerned, people in their 40s and 50s know enough to worry too much, but don’t have the experience to shrug it off, and people in their 60s and later have been around the block enough to not let the noise of the world affect them as much.
It’s not the case for everybody, but there is something to be said for experience being a great teacher. For those of us who haven’t lived through what people in their 60s and later have lived through, reading about it and talking to people who lived it is the next best avenue.
Go for Walks
The pandemic taught me that a walk won’t solve most problems, but it will relieve stress and make the problem seem less important. Your mind will be clearer, and you will worry less about the short-term noise of the world.
Try it. Go for a walk.
Exercise Regularly
Like a walk, exercise does amazing things for the mind. Good endorphins are released. A positive feeling washes over the body. Stress hormones go down.
Exercising regularly is easy to put off. Make a small goal, even five minutes of exercise. Surely you have five minutes to spare?
Surround Yourself with Positive People Who Also Do the Things Above
Everybody has that person in their life who oozes energy and every time you see them, you feel better. Those are the types of people who can help you remember most of what we encounter on a daily basis is short-term noise. Their energy can put you in a better place to be less impacted by short-term noise.
And I’ve said it before, but I’ll say it again – have a plan. Fire drills have specific instructions and are practiced for a reason. An investment plan is your fire drill.
Summary – Final Thoughts
The world surrounds us with short-term noise. Often, short-term noise disguises itself as a big, important, monumental shift in the world, but it usually is nothing more than noise.
Consider my framework for identifying short-term noise:
- If X happens, Y is going to happen.
- Insert famous person with impressive credentials said to do XYZ or said XYZ is going to happen.
- If it is widely publicized on the news.
- It came from anyone not willing to share their past prognostications and their accuracy.
- You ask yourself, “Will this matter in 30 years?” and the answer is no.
Or develop your own framework.
Once you feel comfortable identifying short-term noise, don’t forget to make a plan and take steps to avoid it. More importantly, remember those steps are likely not anything investment-related.