2nd December 2019
How not to get caught up in the short term noise
Have you seen the news? Whatever the headlines are saying, one of the best things you can do for your portfolio is not react with haste.
It’s recognised that a ‘behaviour gap’ exists between investors who accept that volatility is part of their investment journey and investors who move their money around in an emotional response to media headlines.
It is very difficult to avoid headline news, whether that’s Brexit, global trade wars or political and civil unrest. It seems one thing we can all predict is that negative headlines will always make front page news. All these headlines create noise across markets, waves of volatility that echo around the world and spook investors – testing their nerve, and their behaviour.
“Carl Richards, the US author and financial adviser behind the term ‘behaviour gap’, explains that many investors earn lower returns not because of the investments they choose, but because of the way they manage those investments. He argues that those investors would experience better results simply by adjusting their behaviour towards short-term noise.”
We would take that a step further, however, and say that volatility is a fundamental and accepted part of investing. Instead of avoiding headlines altogether, we accept that the noise – or the expectation of noise – should be built into a client’s financial plan.
That won’t change, however, the fact that negative headlines will continue to bombard your favourite newspapers, your evening news and social media channels. So what, beyond stuffing cash under your mattress and turning off your TV, can you do to rise above the noise?
Be clear on your goals, and review them regularly
Your financial plan will be built around your goals, but making sure your finances remain focused on them is all part of a review process. Whether it’s living comfortably in retirement, saving for your children’s education, or helping them get on the property ladder, regular reviews will help you stay focused on the big picture. Thus, short term noise becomes just that – short term.
Don’t get blown off course
Modern technology allows you to be connected to friends and family at all times, your finances and investments at the touch of a button, and also gives you access to global news, putting you face to face with headlines across numerous devices.
While there’s no harm in keeping up to date with the latest events, the key is not to allow your emotional response to those events dictate any unconsidered action on your investment portfolio.
Every update risks creating negative behaviour somewhere in the market, putting plans and goals at risk. Here’s an illustrative example of how the FTSE index has grown over the past 40 years. While major challenges hit the market, this shows that people who stayed on course will have continued to enjoy returns.