Noise is a common problem in music studios. When recording a musician, an audio engineer aims to capture just the artist’s performance, but invariably, distracting buzzes, hums, and pops make their way into recordings, a problem that can lead to undesirable results.
Likewise, when investing, distracting “noise” can upset your investment performance.
Investment noise is information that isn’t useful or relevant to you and your financial aims. It could cause you to make decisions that don’t best serve your long-term plan.
Such unhelpful and distracting noise comes from newspapers, the radio, or TV. However, it can also come from social media or even conversations with friends and family members.
So, to have the best chance of achieving your investment goals, it’s important to mitigate the effect of noise on your decisions. With that in mind, read on to learn how to recognise and filter out unhelpful noise when investing.
Listening to noise can dampen your investing potential
Unfortunately, when exposed to investment noise, it can be easy to make emotion-led decisions. The good news is that there are steps you can take to protect yourself – but more on this later.
For now, it is important to realise that the dangers of emotional investing are very real and could lead you to make costly investment decisions.
For example, you may see a negative news story about a company you hold shares in. Typically, your financial planner would advise you not to react, and instead encourage you to focus on the long-term success of your investments. However, the fear of a potential short-term loss may spur you to sell your holdings, meaning that you may miss out on a potentially valuable stock price rally further down the line.
In fact, CNBC report that the best days in the market tend to occur shortly after the worst . Between 2003 and 2022, seven of the best performing days for the S&P 500 happened within two weeks of its worst days.
The graph below illustrates how a $10,000 investment in the S&P 500 between January 2003 and December 2022 would have grown if it had been left untouched. It also shows how this $10,000 would have performed if an investor had missed the best days in the market.
Source: Visual Capitalist
[This chart is for illustrative purposes only, as an example of the impact timing can have on investment outcomes.]
As you can see, removing your investment and missing the best 60 days in the market would have resulted in returns that were 93% lower than those of someone who held their nerve, ignored the news, and remained invested for the duration.
So, trying to time the market based on investment noise could damage your chances of achieving your long-term investment goals.
Identifying noise can help you filter it out
Identifying information as noise is a helpful way to filter it out. However, when faced with an endless stream of headlines from newspapers, social media, the radio and TV, it can be difficult to distinguish between information that’s useful and what’s not.
Fortunately, there’s a simple vetting process you can use to identify unhelpful noise.
In his book Before Happiness, Shawn Achor defines four types of noise. If information you encounter fits into any of these categories, it’s probably best to ignore it:
- Unusable – information that’s irrelevant to your portfolio or won’t alter your investment decisions.
- Untimely – information that’s going to change by the time you use it.
- Hypothetical – predictions from the public or experts.
- Distracting – information that distracts you from your long-term investment goals.
Once you’ve identified something as noise, you can set it aside and focus on news that could be more relevant to you, helping rather than hindering your long-term financial goals.
Filtering out unwanted noise could help you make better investment decisions
One of the most effective ways to filter out noise is to remove it at source. Simply reducing your exposure to unhelpful news stories can help to limit the effect they may have on your investments.
Methods you could use to reduce your exposure to noise include:
- Learn to be selective about the news sources you read, watch and listen to
- Avoid financial entertainment shows that make predictions
- Remove bookmarked news links and delete apps from your phone
- Unfollow unhelpful pages on social media
Of course, it’s impossible to remove investment noise from your life entirely, but you can still mitigate the effect of noise that manages to slip through your filter by remaining focused on your long-term goals.
A financial planner can help you do this in a number of ways, including:
- Building an investment portfolio with your goals at the heart
- Matching your appetite for risk
- Diversifying your portfolio
- Providing financial coaching
Additionally, having an expert in your corner could make you more confident in your investment decisions and less susceptible to the influence of investment noise.
Get in touch
At Titan Wealth Planning, we share news and information that could prove beneficial and help you build an investment portfolio that supports your long-term goals.
To find out more, email info.wp@titanwh.com or call us on 0800 048 0150.
Risk warnings
The information contained in this article is based on the opinion of Titan and does not constitute financial advice or a recommendation for any investment or retirement strategy.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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