The myth
Keeping a level head is key to withstanding the ups and downs of investing. To stay focused and manage your emotions, some people may recommend that you tune out the noise, follow a strategy, and think long-term.
This means paying no mind to the constant buzz of market news, emerging trends, and deluge of varying opinions from experts and wanna-be experts.
The reality
You need to separate signal from noise to find information that might actually matter to your investing strategy and situation.
Signal is valuable information that can have long-term implications, while noise involves random data that often distracts from the truth, though it may sometimes appear significant for a moment.
For example, the value of an investment may fluctuate from day to day but end up growing by a decent amount after a few years. In this case, the daily swings are just noise and there are underlying factors that could bring long-term growth.
There are investors that ride trends and take advantage of noise for quick potential gains. However, if you don’t have the time or skills to employ such an active strategy, then temporary fluctuations may be irrelevant to you.
Your effort and attention may be better spent refining your investing approach based on your goals, risk tolerance, and time horizon.
Staying informed about economic developments, market conditions and verified news about all of them can help you identify opportunities, but you don’t have to react to every piece of news you read.
In fact, you may want to limit your sources of investing information to only the most crucial and trustworthy ones so you’re less likely to make impulsive moves based on emotions.
When you’re always listening to what everyone is saying, you can also fall victim to herd mentality and other forms of biased decision-making.
Verdict: Mostly true.
Filtering out the noise can help you avoid making investing decisions out of fear, panic, or biased thinking.
There’s nothing wrong with monitoring the news, but you must remember that the news is often designed to capture attention. Negative headlines do not necessarily reflect what’s going to happen in the long term.
Often, the smart choice is to do what you can to protect your portfolio from risks through diversification and making informed decisions by digesting relevant and verified inputs.
This can make it easier to stick to your strategy and potentially win in the long run instead of being swayed by fleeting events or sentiments.
