Cancelling out Investment noise
Thu Aug. 26th 2021
With access to so many sources of information in the modern day, it is hard to filter out what we should be paying attention to, and what is just noise. Your ability to do this could be the difference to how successful you are as an investor.
These days, we hear a lot of noise that can create fear about a lot of things such as Inflation fears, growth fears, geopolitical fears—everyday headlines suggest there are lot of things of which we should be afraid. At the end of his life, Sir Winston Churchill said, ‘When I look back on all these worries, I remember the story of the old man who said on his deathbed that he had had a lot of trouble in his life, most of which had never happened!’ Churchill was speaking about the burden of worries that never materialise.
Long-term well-advised investors know that much of this day-to-day concern will turn out to be just noise. Don’t forget that today’s newspaper is often tomorrow’s fish and chips wrapping! Of course, some predictions may turn out correct, but there’s nothing you can do about that beyond having an investment plan that makes allowances for the unexpected and keeps you tuned in to what’s important.
Take last year’s share market roller coaster as an example. The Australian share market plunged almost 40 per cent at the beginning of the pandemic. The S&P 500 achieved a record closing high of 3,386 on February 19, 2020. However, just over three weeks later, the market closed on 2,480, which represented a decline of around 26 percent in only 16 sessions. On March 23rd, 2021, the US S&P 500 Index had rebounded 76% since its lowest point in the pandemic crash.
Unfortunately, too many people sold their shares or switched their KiwiSaver funds into cash during this time. We don’t talk about this to discourage anyone further who got nervous and cashed up, but the significant share market downturn followed by a fast and favourable bounce back, highlights the importance of looking past short-term ups and downs in financial markets and sticking to your long-term strategy.
AMP Capital chief economist Shane Oliver recently wrote the need to “turn down the noise” and hold your nerve. Dr Oliver said the key lessons from last financial year for investors were:
- To “turn down the noise” of the daily news cycle, so that you can focus on your long-term investment strategy.
- To accept that share markets are forward-looking, as this can help you to understand why share prices can rise even when the ‘real economy’ is struggling
- To realise that timing markets is hard (Michael’s note: if not impossible to do it regularly), so you shouldn’t try to do this unless you’re a professional day trader
- To not “fight the Fed or the RBA” – even though interest rates are low, monetary policy can still affect investment markets in a big way
- To consider interest rates when attempting to value an investment, as low rates lead to higher price-to-earnings ratios
Having a long-term investment plan that’s aligned to your long-term financial goals, based on sound evidence-based research, low cost and is highly diversified with a financial adviser working with you, are keys to ensure you won’t be swayed by the daily noise, the latest fad that appears on the news or you hear at the water cooler or family BBQ.
‘Time is your friend when it comes to building a nest egg’. Louise Cooper, BBC Financial Journalist
Most importantly, your investment plan allows you to focus on the important and enjoyable things in your life and lets the markets do the worrying for you.
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