Investors are constantly bombarded with a barrage of distractions: earnings reports, news releases, upgrades, downgrades, economic data, and geopolitical events.
Just this week I’ve read wildly contradictory pieces about how markets are reacting to our GNU and the apparent deadlock between the ANC and the DA.
How should we manage this firehose of information in relation to our portfolios?
All of those news items are actually (or should be) meaningless to long-term investors.
What we often fail to understand is that the market already knows everything we know. The moment news is released, the market immediately adjusts to incorporate this new information, driving price movements instantaneously. By the time you react, it’s already too late.
That’s why I say these datapoints are meaningless to long-term investors.
A great example of this is what happened to the ZAR when the US ambassador to South Africa accused us of supplying arms to Russia. The rand blew out BEFORE the announcement was made. If the market somehow knew what he was going to say before he said it, what chance do we as retail investors have.
The price changed and adjusted to that new information immediately. My guess is that there were large quantitative hedge funds using live pricing and media data points to instantly trade on signals that were constructed using sophisticated AI algorithms built by PHD Harvard and MIT educated hedge fund analysts.
Do you still think you have an edge?
I’m not suggesting that data points like inflation, economic growth, or company earnings aren’t important. That’s not quite the case. These factors are indeed important, but that doesn’t mean you should take immediate action based on them.
One of the great ironies of investing is that people idolize Warren Buffett and Peter Lynch, both of whom strongly advise against trying to time the market. Yet, many of these same investors ignore this advice when it comes to their own portfolios and do the exact opposite.
Investing is actually quite simple: follow Buffett’s advice—invest in a broad, low-cost index fund, or buy high-quality companies and then hold them forever. Match your asset allocation in your portfolio to your short term and long term goals. Be cognisant of tax.
This sounds simple enough. But it’s actually quite difficult to execute and stay the course due to our emotional challenges.
The media exploits emotions and fears because they know people will react. They want you to tune in, as that’s how they make money from advertisements. But their interests don’t align with yours.
In the face of a constant stream of corporate news—dividends, mergers, bond issuances, stock splits, acquisitions—what should an investor really be doing?
The answer? NOTHING.
Literally. But only IF you have a well thought-out plan that has anticipated bear markets, recessions, and black swan events that could hit the market.
Because if you do have a plan, then when those black swan or negative events occur, your portfolio will be able to absorb those shocks, and you’ll be ok.
But if you don’t, you are likely to have problems driven by fear and you will panic and sell because your stomach will take over. You’re going to lose sleep worrying and life’s too short not to enjoy it.
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