I write a lot about blocking out the noise from the media:
- What the market did today,
- What this or that analyst expects the market to do next month,
- What this or that stock did over the last few weeks.
The way I see it, all that stuff is just noise.
But every bit as dangerous is the noise from inside. A lot of noise rises up from inside ourselves.
- When the markets go down, fear (or perhaps even panic) arises in many people. That’s noise.
- When the markets start rising quickly, excitement, greed, and lust arise in many people. That’s noise too.
The more successfully you block out that noise, the better off you’ll be. How can you improve your chances of blocking out the noise from inside? Here are three of my favorite ways:
Have an Appropriate Asset Allocation
If you have an asset allocation that’s appropriate for your expected holding period and for your volatility tolerance, you can take comfort in knowing that–aside from rebalancing and continuing to invest–there’s nothing you really need to be doing.
Automate Your Finances
Get as much as possible on autopilot. If you’re automatically contributing to your IRA and 401(k), you don’t have much reason to check your portfolio everyday. In my experience, this helps with blocking out both the fear in down markets and the greed in up markets.
Educate Yourself
The more confident you are in the research and data upon which your investment strategy is based, the more confident you’ll be in the strategy itself. Take the time to educate yourself about investing. Read books. Read blogs. Read everything you can get your hands on.
How Do You Block Out the Noise?
What’s your favorite way of blocking out the fear, greed, or other dangerous emotions that threaten to throw your investment plans off track?
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{ 6 comments… read them below or add one }
My favorite way of blocking out the noise is — Surprise! Surprise! — paying attention to valuations.
All price changes that are greater than 6.5 percent real (the return justified by the productivity of the U.S. economy) or less than 6.5 percent real are neutralized for the Valuation-Informed Indexer. Returns of greater than 6.5 percent real cause diminished returns in future days. So there is as much bad to them as there is good. Returns of less than 6.5 percent real cause enhanced returns in future days. So there is as much good in them as bad.
There is no noise for valuation-informed investors. Once you begin looking at stock investing in realistic ways, you see what is really happening when returns are too high or too low and the noise just naturally dissipates.
Rob
Mike and Rob have fundamentally different principles on how to execute a passive investment strategy. One approach ignors the “noise”, while the other uses the “noise” to adjust accordingly. The fundamental difference between them is that one values the noise and the other doesn’t.
Keep up the good work Mike!
Mike,
1) The media cannot explain why the market behaves as it does. And no one really cares. So ignoring them is the perfect solution. Agreed
2) I want to raise a question. Please NOTE: this is not necessarily a disagreement, it’s just a question:
a) “If you have an asset allocation that’s appropriate…there’s nothing you really need to be doing.”
b) “The more confident you are in the research and data upon which your investment strategy is based, the more confident you’ll be in the strategy itself.”
Those quotes bring up the question: Why should an investor have confidence that proper asset allocation is the right approach?
Sure asset allocation is a positive step, but you suggest it is sufficient. I disagree. I believe it’s far more important to protect the value of your assets (guaranteed) rather than hope asset allocation will always work as it is intended.
There is more than one way to invest when the goal is to achieve growth, with as much safety as possible, over time.
Thank you for stating things fairly despite our difference in viewpoint, Brian.
Rob
Mark: Same answer as before. I understand the benefit of using options for a guarantee against loss in value. But there’s a cost that’s attached to that guarantee, and I’m not convinced that the cost is worth it (as compared to simply using asset allocation to adjust risk).
I’ve still never seen anybody provide information that options do a more cost-efficient job of reducing risk than asset allocation does.
Also, asset allocation can provide guarantees, if that’s what you want it to do.
ok. Thanks.