Just ignore the noise!
Many a financial advisor has uttered those words over the years. They hand you phrases like this when you get your CFP. It’s advice that sounds good.
But there is a difference between good advice and effective advice. There’s plenty of good advice anywhere you look these days but lots of people simply ignore it because it’s not easy to follow.
Good advice is preaching to your clients to stay the course.
Effective advice is building portfolios that are durable and behaviorally aware enough to help clients stick to their plan.
Good advice is to ignore the noise.
Effective advice is to create a comprehensive investment plan that focuses on those things that are within your control.
It’s nearly impossible to ignore the noise today because you have a rectangular supercomputer in your hands all day long that constantly beats you over the head with news, alerts and social media posts.
Of course, in some ways, markets need noise to function. Fisher Black wrote the following in his aptly titled research paper, Noise, back in 1986:
The effects of noise on the world, and on our views of the world, are profound. Noise in the sense of a large number of small events is often a causal factor much more powerful than a small number of large events can be. Noise makes trading in financial markets possible, and thus allows us to observe prices for financial assets. Noise causes markets to be somewhat inefficient, but often prevents us from taking advantage of inefficiencies. Noise in the form of uncertainty about future tastes and technology by sector causes business cycles, and makes them highly resistant to improvement through government intervention.
Noise makes financial markets possible, but also makes them imperfect.
Noise is never going away so what should you do about it?
The way I see it there are two ways to deal with the firehose of noise in the information age:
(1) You learn to live with it.
(2) You keep yourself busy with other stuff.
In The Power of Habit, Charles Duhigg tells the story of Tony Dungy’s NFL coaching career trajectory. Dungy was constantly getting passed over for head coaching jobs early in his career because so many organizations assumed his philosophy was too simple.
Dungy kept things simple on purpose.
He wanted his players to follow a repeatable process so they didn’t have to make so many minor decisions during a play. The trouble came when players ignored the process and followed their instincts:
“We would practice, and everything would come together and then we’d get to a big game and it was like the training disappeared,” Dungy told me. “Afterward, my players would say, ‘Well it was a critical play and I went back to what I knew,’ or ‘I felt like I had to step it up.’ What they were really saying was they trusted our system most of the time, but when everything was on the line, that belief broke down.”
What finally clicked with his players at both the Bucs and Colts (where he won a Super Bowl) is the idea that you have to believe in your system at all times, not just when you feel like it. Your brain only has a finite amount of willpower so creating good habits that become second nature can help you avoid overreacting.
On the other end of the spectrum, some people ignore the noise by living their lives.
I had a call with a client this week. I had a whole market update ready with charts about oil, geopolitical risks and such to put the current environment into perspective.
Then I asked the client what they thought about the situation.
I haven’t really been paying attention. I have too many other things going on in my life and work right now.
That was music to my ears.
In his poem, A Little Learning, Alexander Pope once wrote:
A little learning is a dangerous thing;
Drink deep, or taste not the Pierian spring:
There shallow draughts intoxicate the brain,
And drinking largely sobers us again.
The worst place you can be is stuck in the middle ground between a deep understanding and blissful ignorance.
Michael and I talked about all of the noise going on in the markets on this week’s Animal Spirits video:
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Further Reading:
Preparing Without Predicting
Now here’s what I’ve been reading lately:
Books: