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Tuning Out Market Noise

Written by Preet Banerjee

Tuesday, September 10th, 2019

If distractions from other people have ever knocked you out of "the zone" when performing a task, you know how annoying it can be. We've all had a movie theatre experience ruined by a nearby couple who apparently don't know that carrying on a full conversation during a movie is not cool.

Distractions get in the way of things. Some of the biggest distractions for long-term investors are newspaper headlines about short-term market movements and predictions. In other words, 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 between the beginning of the year of the first headline and the end of the year of the last headline, the S&P 500 (one of main US stock market indices) had an annualized return of 11.31% and that $1 invested would have grown to $2.36 at that rate of return.1

But those 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

Let's consider the news sources' business models: advertising dollars linked to the number of eyeballs reading or viewing their content. Reading about long-term investment strategies would get stale over time. Nothing really changes when it comes to building a prudent portfolio.

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. But writing about short-term market movements is more attention grabbing.

You may sometimes see reports that say, "The markets are going down!" That's not an entirely accurate way of reporting stock market moves. At best, they should say the markets have gone down.

Generally speaking, the alarmist approach is more likely to get you to tune in. And the more tuned in to short-term market movements you are, the more tempted you'll be to abandon your long-term investing plans.

Ignore the Noise

This is known as financial noise. Noise that distracts us from the principles of long-term investing.

This 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.

1 Based on numbers from this chart and calculations done here.

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