Tuning Out Market Noise
Written by Preet Banerjee
Tuesday, January 19th, 2021
Some of the biggest distractions for long-term investors are news headlines about short-term market movements, whether they're due to health crises, current events, or anything else. This is often referred to as "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.¹
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.
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, whether they're stocks or ETFs (Exchange Traded Funds), your portfolio is likely going to be less volatile than the headlines indicate.
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.