Tuning Out the Noise
Austin Carroll is a financial advisor at Cornerstone based in Reno, NV. Austin has passed his Series 65 Securities Registration Examination. He has a passion for helping others achieve their financial goals and is excited to be a part of the Cornerstone team.
TUNING OUT THE NOISE
Markets are down, inflation is at a 40-year high, interest rates are rapidly rising, and the general sentiment for the economy is not very bright. So, what do you think the headlines will be when you read the news or turn on the television? You guessed it, all the bad and awful things that ‘could’ happen. Unsurprisingly, when we look at the impacts this has on investments, we start to see unusual behavior from investors. This is where behavioral finance can be beneficial to investors in understanding why the markets might be behaving in an irrational manner.
Behavioral finance is the study of the effects of psychology on investors and financial markets. It concentrates on explaining why investors often lose their self-control, act against their own best interest, and make poor decisions that are based more on feelings and a bias rather than facts and reasoning. Therefore, we as investors are more apt to sell when the market is going down, instead of going up, and buy when the market is going up instead of going down. Meaning that, investing as a contrarian is often an effective strategy simply because it goes against our natural instincts that are based in greed and fear. Complicating this whole issue and playing into our fear and greed is the seemingly unending feed of news and information from the media.
You see, financial news media, or any news for that matter, is not here for the sole purpose of providing us investors with useful information all day and night. They are in the business of having viewers, readers, and subscribers on their phones and televisions, as much as possible. Media companies make money by selling advertisements, and the more viewers there are, the more profits from selling advertisements. And so, when we see “breaking news” followed by talking points from pundits and experts, we must keep in mind that its often only pertinent for the short term to grab your attention and completely irrelevant to long term investing.
Successful investors set goals, are objective with market news, and know their personal limitations. Every person should invest with a purpose and goal in mind while being honest with themselves as to what they are personally capable. This helps to create the boundaries in which a person will invest, and what we should realistically expect from our money. We must also be leery of trends and fads within the markets. For instance, investing in real estate in 2006 because real estate was ‘hot’ probably would have left you upside down in a big way by the end of 2008. Contrasting that strategy, if you did get burned in 2008 and never re-joined the market, you would have missed out on a 600% bull market from 2008 to 2022. Believing that we are going to jump on the latest hot pick and ride it to new highs is a great way to introduce unnecessary risk to our portfolio. Just as constantly watching negative news gives us a pessimistic outlook and thus, we never take risk.
In summary, investing effectively typically comes down to your ability to tune out the noise and stick to your goals over the long term. There will be times when we are tempted to jump in and out of the markets, but if its not within our investment goals we can hinder ourselves in the long run.