Investing decisions can be hard with all of the noise out there. As a financial advisor, I’ve seen the damage caused when people aren’t informed about their money. It is NEVER advisable to bury your head in the sand, and everyone should strive to learn more.
By asking questions and seeking information, we learn and grow. Knowledge is power. But pay attention to the source and who the information is intended for.
If you can tune out the noise from financial news media and others, you will be on your way to long-term investing success. Let’s explore the pitfalls of common distractions and focus on what truly matters in achieving financial growth.
Noise to Ignore in the Financial World
Quarterly Earnings Results
If you are in a diversified investment portfolio (which you should be), one company’s quarterly earnings results will tell you nothing about where your investment portfolio will be in the future. While individual stocks may see volatility following earnings announcements, these short-term fluctuations rarely impact the broader trajectory of a well-constructed portfolio.
Instead of reacting to earnings reports, consider focusing on the overall health of the sectors or industries you are invested in. A single company’s results are just a snapshot and often do not reflect larger trends.
Commodity Prices
Most recently, some pundits have asserted that the crash of oil prices will lead to a recession. Others argue it will improve the economy. Will the price of oil impact the economy in some way? Yes. Will it meaningfully affect your ability to save and invest for the long term? Likely not.
Instead of fixating on volatile commodity prices, pay attention to broader economic indicators like GDP growth, employment rates, and consumer confidence, which tend to have a more direct impact on long-term market performance.
Political Campaigns
Electing our leaders is important, and it is our duty to be informed and vote. But if your preferred candidate or political party doesn’t make it into office, bailing on your investment plans makes little sense.
Historically, markets have performed well under different political regimes, regardless of party. Focus on creating a resilient portfolio that can weather the inevitable policy shifts that come with changes in leadership.
International Relations
There will always be conflict brewing somewhere in the world. Tensions can flare, and when they do, many will focus on the worst possible scenario. Even the prospect of war is understandably a scary thing. However, altering your investment plan every time there’s a military conflict will leave your portfolio in a constant state of flux, diminishing the benefits of long-term strategy.
Consider the broader context—markets often price in geopolitical risks, and diversification across regions can mitigate the impact of localized conflicts.
Stock Indices Like the Dow, S&P 500, and Nasdaq
Unless you can follow the movement of these indices daily without becoming anxious, ignore them. Headlines like, “Dow drops/gains 300 points” and “Major indices down/up for third consecutive week” are often misleading. These reports create a false impression of the true state of the market, which can prompt emotional and ill-informed decisions.
Instead, focus on trends over months or years to get a clearer picture of market health. Short-term index movements are often driven by noise, not fundamentals.
What do these topics all have in common? They are outside of our control. Letting them affect your long-term investing decisions can be a big mistake. Instead of getting worked up over external noise, focus on what you can control.
Focus on What You Can Control
Risk Tolerance
Understand your own comfort with risk. Are you willing to withstand market downturns, or does volatility make you uneasy? Align your investments with your ability to endure short-term losses while pursuing long-term gains. Conduct a periodic review of your risk tolerance as life circumstances, such as age or income level, change over time.
Investment Objectives
Define your financial goals clearly. Are you saving for retirement, funding a child’s education, or building wealth for other purposes? Your objectives should guide your investment strategy. For example, retirement savings might require a mix of growth and income-oriented investments, while short-term goals like buying a house may necessitate a more conservative approach.
Time Horizon
The length of time you have to invest significantly impacts your approach. A young professional saving for retirement has a different strategy than someone nearing retirement. Embrace a long-term perspective when appropriate. For short-term goals, prioritize stability and liquidity. For long-term goals, leverage the power of compounding and growth-oriented investments to maximize potential returns.
Controlling Costs
Investment fees and cost have dropped significantly over the years. There are so many more low cost investment options out there and the competition for your dollars is fierce. It’s quite common for index Exchange Traded Funds (ETFs) to have operating costs below 0.10%. Compare that with actively managed mutual fund expenses well over 1.00%.
Minimizing Taxes
How much we pay in tax is mostly within our control. We can choose investments that are more tax efficient than others. Having actively managed mutual funds within a taxable brokerage account (non-retirement) may not be the best strategy. Mutual funds distribute their capital gains to shareholders which can increase taxes. On the other hand, ETFs are much more tax efficient and significantly reduce your tax bill.
Owning individual stocks within a brokerage account allows for tax loss harvesting to minimize capital gains taxes. Unlike mutual funds, there are no capital gains distributions for individual stocks. Lastly, you can often control which lot of shares you decide to sell. This gives you the choice to sell lots with a lower unrealized gain.
Entertainment Masquerading as News
Today, information is at our fingertips via the internet, and traditional media remains influential. The sad reality is that when we look for information, we are often being entertained instead. If you’re watching a financial news channel to see what might be happening in the markets that day, be honest with yourself. You might learn something new, but you’re probably just being entertained.
Everything you see and hear is designed to keep you watching or reading, not necessarily to inform you. The reality is that prudent investment advice is far too boring for TV. Sensationalism draws viewers, but it can lead to poor financial decision-making.
Separate Entertainment from Information
To be fair, there is plenty of information and commentary by very intelligent people who are experts in their various fields. This is in no way meant to disparage the work of reporters and others who work every day to bring information to light.
However, it’s crucial to discern when you are being informed, when you are being entertained, and whether the information is applicable to your situation. Be skeptical of headlines that are overly dramatic or designed to elicit an emotional response. Instead, seek out data-driven analyses and expert opinions that align with your investment strategy.
The Role of Discipline in Investing
Discipline is one of the most critical factors in long-term investing success. By ignoring distractions and sticking to your plan, you’ll foster better decision-making. Here are ways to stay disciplined:
Stick to Your Plan
Once you’ve developed a sound investment strategy, resist the urge to make frequent changes. Constant tinkering based on short-term market movements often results in unnecessary costs and missed opportunities. Have a clear roadmap for your financial goals and trust the process.
Rebalance Your Portfolio
Periodic rebalancing ensures that your portfolio aligns with your risk tolerance and goals. This process involves selling assets that have performed well and buying those that have underperformed to maintain your desired allocation. Rebalancing prevents your portfolio from becoming too heavily weighted in one area, preserving diversification.
Avoid Emotional Reactions
Fear and greed are powerful emotions that can derail even the best-laid plans. Avoid making decisions based on panic during market downturns or euphoria during bull markets. Develop a habit of pausing to review your strategy before reacting to market events. This discipline can prevent costly mistakes.
The Power of Compounding
One of the most potent tools in investing is the power of compounding. By reinvesting earnings, you allow your investments to generate returns on both the principal and accumulated interest over time. The longer you remain invested, the greater the potential for growth.
This underscores the importance of staying invested and avoiding impulsive decisions. For example, investing $10,000 at an annual return of 7% will grow to nearly $20,000 in 10 years and over $76,000 in 30 years. Time and consistency amplify results.
The Value of Financial Advisors
A trusted financial advisor can provide valuable insights and guidance. They can help you create a plan tailored to your needs, keep you accountable, and offer a rational perspective during times of market volatility.
Partnering with an advisor can be particularly beneficial if you find it challenging to navigate the complexities of investing on your own. Advisors can also help with tax-efficient strategies, estate planning, and other areas to maximize your wealth.
Closing Thoughts
Keep it simple and stay focused on your risk tolerance, investment objectives, and time horizon. Tuning out the noise will foster better investing decisions and lead to long-term success. Remember, the most impactful aspects of investing are within your control. Embrace a disciplined approach, stay informed without becoming overwhelmed, and maintain a long-term perspective to achieve your financial goals.
Have you considered how a Certified Financial Planner™ can help you?
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