Maintaining focus is a basic investment discipline but a difficult task for many investors owing to the market noise. Apart from non-stop television coverage of financial markets on various business news channels, there are a number of websites worrying about the western market movements. Let us discuss below why and how one should avoid market noise.
Pay no heed to market noise
Heeding to this market noise is not good as this leads to short-term thinking and over-reaction which will affect your long-term portfolio gains. Analysing each and every event, assessing its implications on your portfolio and trying to time the market can be a mindless task. With round-the-clock news coverage, you are bombarded with updates and flash news on various events which may not have any significant impact on your portfolios, except for the short term. Not all information is good and relevant.
Identifying relevant news
Investors find it difficult to recognise what is relevant news as it is much easier to recognise what is new. The relevant versus the new is the fundamental battle investors must win. Contrary to popular beliefs, news consumption is a competitive disadvantage. The less news you consume, the bigger the advantage you have. By avoiding short term noise, investors are able to invest systematicallywithout monitoring their portfolios at short intervals which eventually helps them get the power of compounding.
Do not invest through volatility
Your investments will go up and down in value, as markets turn volatile. But, the question is whether this volatility will bother you enough to make you over-react and do something which is not warranted. For instance, if you over-react to volatility, it increases the chances that you will end up selling low, only to buy high when you want to get back in later, after prices rise. Investors should understand clearly that volatility and risk are two different things. There are adequate empirical evidence available to prove that trading on volatility does not improve long-term returns.
Transaction cost, tax implications
Trading frequently based on market news can lead to higher transaction costs and tax implications. For instance, if you are in a high tax bracket and you trade in stocks regularly after listening to market noise, you will be triggering ordinary income tax as high as 30% on your gains. By contrast, if you invest occasionally rather than regularly, after owning stocks for at least a year, the long-term capital gains tax rate of 10% only applies.
Focusing on price alone is not really investing. Rather, it is speculating. Investing is about seeking value. Obsession with short-term market movements make sense only for day traders who make money by accumulating small gains and attempting to limit losses on as many stocks as possible. So, they really do not care about long-term trends, but the investor managing a portfolio for a long term horizon definitely should.
So, to conclude, instead of listening to market noise and trading, put your phone down, relax, and keep your eyes on the reward: your long-term portfolio returns.
The writer is a professor of finance & accounting, IIM Tiruchirappalli
