The Importance of Ignoring Market Noise

Warren Buffett has famously taught that, like dieting, successful investing is far easier to understand than to accomplish – because it requires discipline and checking your emotions at the door.⁽¹⁾

Perhaps nowhere is discipline more important than managing the never-ending flood of market information targeting investors through various media outlets – "market noise". The reason this noise is dangerous is that it compels short-term thinking and overreaction that can wreak havoc on long-term portfolio gains. As we have said in the past, market volatility is a fact of investing and goes hand-in-hand with the return potential we have seen in recent years like 2017 and 2019.

A consistent problem for managers and investors alike, is maintaining focus. Today's investors are constantly bombarded with up-to-the-second news and phone alerts, but very little of it is truly useful when it comes to making intelligent long-term investment decisions. The more frequently you look at information, the more meaningless "noise" you will disproportionally receive.

Investing through volatility

The late John Bogle, founder of The Vanguard Group, said the question isn't whether your investments will go up and down in value, because this will inevitably happen. Rather, he said, the question is, "will the fact that investments go up and down bother me enough to do something dumb?"⁽²⁾

If you are volatile in the face of volatility, the chance you'll sell low, only to buy high when you want to get back in later, increases.



At WT Wealth Management, we often tell our clients volatility and risk are two different things. Risk is a choice that we can manage over the long-term. Volatility, which is often headline-driven and has a short-burst shelf life, is a circumstance outside our direct control.

Unfortunately, in today's technology-driven world, many market declines, as well as surges, are generated by computer algorithms designed to trade automatically in response to certain price movements, tweets and even the number of times a keyword appears in financial publications. This trading is so massive it can affect prices over ultra-short periods of time. Much of the noise you hear about volatility stems from this type of institutional, algorithmic trading – not the individual investor like yourself making a buy/sell decision on an individual portfolio.

Fortunately, the markets also have a history of long-term stability in spite of short-term volatility and noise. ETF Provider, First Trust, has produced some of our favorite charts over the years. The chart below shows performance of the S&P 500 Index over the past 40 years as 12 major epidemics have occurred. The takeaway message of the chart is a proper perspective of the market's overall resiliency through crisis, reminding us of the benefits of investing for the long-term.



Noise in This Week's News

The coronavirus news is a combination of fact and noise. The fact is that we are encountering a new strain of the "human coronavirus, common throughout the world."⁽³⁾ The noise stems from the mainstream media coverage of this "uncertainty" – the great amplifier of noise. And as we have said before, equity markets hate uncertainty.

We would never downplay the loss of human life, but the US Center for Disease Control estimates that so far this season there have been at least 29 million flu illnesses, 280,000 hospitalizations and 16,000 deaths.⁽⁴⁾ There is less media noise about influenza than coronavirus – even though it is massively more impactful – because it is familiar to us all.

The entire world has a vested interest in curtailing the spread of this new strain of human coronavirus and we feel concerted efforts will prevail. In last month's Special Market Update we included a chart showing the short-term volatility and long-term stability of the equity markets during the H1N1, Bird Flu and the SARS outbreaks. We recommend revisiting that for some perspective.

Conclusion

Is the noise in the current news headlines the impetus for a pullback or a correction? In normal years we have at least one 5% pullback (May 2019 was the last occurrence). One 10% correction occurs, on average, every 22 to 24 months (with the last one being 14 months ago in Dec 2018).⁽⁵⁾ In fact, since we've already seen a -10.72% correction this week from February 24th to 27th, it appears to be a certainty that the noise has fueled this decline.

In the end, additional information will eventually reduce uncertainty, abate fears, and help the global equity markets regain their footing as investors return to examining economic facts and fundamentals.

As always, this is an excellent time to reach out to your financial advisor rather than sit and worry. As John Bogle famously said (and we are quoting him twice in this update because it is so important), "will the fact that investments go up and down bother you enough to do something dumb?"

The experts at WT Wealth Management are here to ensure that doesn't happen. We've seen these issues before and will see them again. When the equity markets have the ability to flip investor sentiment from endlessly hopeful to endlessly hopeless over one weekend, you need experts in your corner to help separate the wheat from the chaff.

Sources

⁽¹⁾https://www.cnbc.com/2020/01/09/billionaire-warren-buffett-shares-indispensable-life-advice-he-learned-more-than-40-years-ago.html

⁽²⁾https://www.marketwatch.com/story/why-bogle-and-buffett-tell-investors-to-ignore-market-noise-2015-06-04

⁽³⁾https://www.ynhhs.org/patient-care/urgent-care/flu-or-coronavirus

⁽⁴⁾https://www.cdc.gov/flu/weekly/index.htm

⁽⁵⁾https://www.fool.com/investing/2018/12/19/5-stock-market-correction-statistics-you-need-to-k.aspx