the empowered investor
Lowering the Volume on Investment Noise
Too Many Choices, Too Many Voices Create Tricky Investment Traps and Pitfalls
- We believe that investment noise is the greatest obstacle most investors face.
- The noisier it gets, the harder it is to lower the volume and focus on what really counts over time.
- The most essential investment skill you can develop is the ability to recognize and tune out four sources of investment noise: the media, experts, friends & family, and yourself.
- To tune out the noise, and tune into being an Empowered Investor, focus on education and awareness, have a process in place, and appreciate that time is on your side.
“When we talk about [investment] noise, it applies to everybody. Regardless of intellect, regardless of capacity, regardless of financial knowledge, regardless of how much you know about how to invest.”
We’re glad you’re back, after we introduced our new Empowered Investor blog series in our last post! We hope not, but let’s say this happens to you:
You woke up this morning with a headache. Ugh. With a busy day ahead, you decide to search the Internet for remedies. Unfortunately, you’re hit with a deluge of advertisements, articles, doctor’s orders, and home remedies. There’s just too much of it! You close your browser in disgust, and go back to bed. Mercifully, by the time you awaken, your headache is gone. What a relief.
The analogy reminds us of the obstacles that stand between you and your ability to achieve dependable financial security. In our opinion, NOISE is the greatest obstacle of all. As we described in our book, “The Empowered Investor,” there are simply “too many choices, too many voices telling you how to invest.”
Four Kinds of Investment Noise
Unfortunately, investment noise has a sneaky way of disguising itself as useful information. Breaking news, a friend’s hot stock tip, or the buzz inside your own head may seem important at the time. But if anything, the more urgently you’re tempted to react to incoming information, the more likely it’s just a pointless distraction. And the noisier it gets, the harder it becomes to lower the volume and focus on what really counts over time.
What’s an investor to do? The most essential investment skill you can develop is the ability to recognize and tune out these four main sources of investment noise:
- The Media
- The Experts
- Friends and Family
NOISE FROM THE MEDIA
For better or worse, most of us are exposed to a daily news spew. Whether you’re hearing it, watching it, or reading it, it’s hard to avoid it. And because the media tends to deliver a steady stream of alarming news, it skews your view of reality. The late Hans Rosling described this phenomenon in his book, Factfulness:
“In 2016 a total of 40 million commercial passenger flights landed safely at their destinations. Only ten ended in fatal accidents. Of course, those were the ones the journalists wrote about: 0.000025 percent of the total. Safe flights are not newsworthy.”
NOISE FROM THE “EXPERTS”
The Internet has made it even easier for anyone with a credential, an opinion, and a smooth delivery to invade your space, and sound like they’re making a whole lot of sense. This means there’s a never-ending supply of talking heads who are ready and willing to share their views on unfolding events, and what you, as an investor, should do about them.
First, even informed advice may not apply to your particular needs when it’s generically supplied. Second, many of those “experts” have hidden agendas behind their seemingly sage suggestions. Remember that the next time a talking head is trying to talk you into altering your investment portfolio. As any sales pro will tell you, there are countless ways to massage statistics by emphasizing this and omitting that, until a desired point has been made.
NOISE FROM FRIENDS AND FAMILY
When we socialize with one another, we love to tell each other good stories—including stories about our favorite investments. Except, while most of us are happy to talk about our best trades, we’re less anxious to broadcast our financial mistakes and bad luck breaks.
Once again, this paints an unrealistic view of the investment landscape. We’re not suggesting you should tune out the people you love and admire. But while your friends and family usually mean well when swapping investment stories, they are unlikely to know well. They don’t know you and your investment goals. They don’t know what markets are going to do next. They don’t know your financial interests.
When friends and family share their favorite financial conquests with you, congratulate them warmly and wish them well. Then stick to your own investment plan.
YOUR OWN NOISE
Once we get past everyone else’s noise, we must still admit we’re only human. Our human emotions and biases are forever tugging at our sleeve, clouding our judgment, and delivering deceptive messages such as “This time, it’s different,” or “I want what they’ve got.”
Wrestling with fear, hope, or despair while riding the roller-coaster of stock and bond returns can result in portfolio decisions you’ll later regret.
Plus, how we spend or save our money is often intrinsically linked to our self-image and self-worth. It’s hardly surprising, then, that your personal finances can be an intensely emotional topic—or that your emotions may overshadow your rational investment decisions. And although you may usually be able to avoid making misguided investment moves, even a handful of them at the wrong times can do a lot of damage, fast.
To Be a Better Investor, Sleep on It
So, how do you tune out all that noise from the press, the experts, your social circles, and yourself … and tune into being an Empowered Investor? Three thoughts here:
- Focus on education and awareness, so you learn how to differentiate the noise from the knowledge you need to make informed investment decisions.
- Have a process in place, to guide you past the distractions. Even once you recognize noise for what it is, it can still push you off-course if you have nothing to fall back on.
- Appreciate that time is on your side. When you encounter investment noise, treat it like that low-grade headache: Go somewhere quiet, and let time work its healing power.
As we’ll cover in upcoming posts, once you have mastered the art of ignoring the four main kinds of investment noise, you’re well on your way to being an Empowered Investor.
Next, we’ll turn to additional pitfalls to avoid. If you have questions or comments about what you’ve read so far, please reach out to us today. We love hearing from our readers!
For more on the challenges of investment noise, check out our Empowered Investor Podcast episode entitled: Investment noise: leads to traps and pitfalls for investors
- Factfulness, by Hans Rosling
- Noise, by Daniel Kahneman, Olivier Sibony, and Cass Sunstein
- And, as always, our own book, The Empowered Investor
More Winning Investment Principals
Investment Principal #4: Using Investment Factors To Pursue Higher Returns
By mixing and matching factor-based asset classes into a personalized portfolio, you can pursue higher expected returns while managing the investment risks involved.
Investment Principal #3: Using Passive/Index Funds or ETFs
Index-based or passive asset class funds focus on how to reduce the costs and frictions involved in capturing the market’s generous expected returns over time.
Investment Principal #2: Diversify Your Asset Classes
The magic behind diversification is found in a financial measure known as correlation, or the degree to which two asset classes move in similar patterns.
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