Tuning Out Market Noise

Written by Preet Banerjee

Wednesday, February 26th, 2020

If you've been paying attention to the news lately, you've probably been hearing a lot about two things: the coronavirus (COVID-19) and volatility in the markets. Health emergencies tend to impact the economy, and that tends to impact the markets.

Some of the biggest distractions for long-term investors are news headlines about short-term market movements, whether they are due to health crises or anything else. This is “market noise".

Consider the Following Market Noise Headlines:

August 4, 2011: "Stocks Plunge on Fears of Global Turmoil"

September 30, 2013: "Dow Jones and Nasdaq down sharply as US government shutdown looms"

October 24, 2018: "Slumping Stock Market Enters Negative Territory for the Year"

It's important to note that between the beginning of the year of the first headline and the end of 2019, the S&P 500 (one of main US stock market indices) had an inflation-adjusted annualized return of 11.37% and that $1 invested would have grown to $2.63 at that rate of return.2

Keep in mind:

  1. We never know how markets will react after economic or geopolitical events. They could rebound, stay flat, or keep going down.
  2. There will always be events that create uncertainty, and as long-term investors, our resolve will continually be tested from time to time.

Here's something interesting to consider: Citing Dow Jones Market Data, MarketWatch.com reported that in previous health emergencies, such as SARS, Zika, Avian Flu, and other crises, market performance is generally positive not too long after the reporting of the first cases. Of the 12 health emergencies they list, 11 of them saw the major U.S. stock market index in positive territory within 6 months.

That in and of itself doesn't guarantee that markets will follow the same trajectory now, but it does provide some context. When reacting to negative news, markets tend to react quickly to that uncertainty with sharp drops in prices. But prices also have tended to increase before those crises have fully played out as well1.

How to Deal with Market Noise

The above headlines pull our focus from the long-term returns of the market and onto the short-term volatility that can persuade us to make changes to our investing strategies. Making reactive changes to their portfolio is one of the main ways people lose out on potential returns available by simply sticking to their plans.

Build Your Portfolio for the Long Term

A prudent portfolio takes into account that, yes, the short term is unpredictable, but over the long term, patient investors get rewarded for stomaching those ups and downs. The more tuned in to short-term market movements you are, the more tempted you'll be to abandon those long-term investing plans.

And don't forget: unless your portfolio is 100% in equities, your portfolio is likely going to be less volatile than the headlines indexes.

Ignore the Noise

Noise is not new. This is something that's always existed, and likely always will. Take a look at the 100 Year Historical Chart of the Dow Jones Industrial Average. When you take a step back, you'll notice the overall direction of the chart. There are fluctuations but things have ultimately trended upward. That's the difference between a short-term focus and long-term focus.

 


More Questions?

Remember, our Investment Funds Advisors are here to answer any questions and guide you on reaching your investment goals. Feel free to call us at 1-877-464-5678. We're open Monday to Friday from 8 am to 8 pm ET.

 

1 “How Will Coronavirus Affect Your Portfolio?" https://ofdollarsanddata.com/how-will-coronavirus-affect-your-portfolio/

2 Based on numbers from this chart and calculations done here. Adjusted for inflation, includes re-investment of dividends.

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