Ignore the Noise of the Market

12 Principles of Intelligent InvestorsThe following excerpt is from our ebook “12 Principles of Intelligent Investors,” which you can download here.

Want to get better at investing? Are you looking for simple, approachable ways to deepen your knowledge of the keys that create financial success? Using academic research and expert advice, this resource offers 12 principles for building wise, sustainable wealth.

Principle 2: Ignore the Distraction of Daily Market Pricing

The previous point demonstrated how group intelligence makes for efficient markets (and accurately counted jelly beans). Now we’ll consider how market prices are set. This information is essential to help you play with, rather than against, the wisdom of the market.

The 24-Hour News Cycle

One of the major reasons market prices change is the never-ending news cycle. We are continually exposed to reports of all kinds of events happening around the world. For example, when there are reports of blight impacting California’s almond farms, almond futures might spike as the market anticipates a smaller supply.

Ignore the Noise of the MarketSource: Dow Jones-UBS Orange Juice Subindex. Dow Jones data provided by Dow Jones Indexes.

You may wonder what all this global information means for you and your investment portfolio. Is it better to buy? Sell? Just ride it out? Instead of reacting to every trend that shows up on the cable news shows, you should know there is conclusive information available on how not to react. Statistical evidence reveals that you cannot consistently improve your investment results by changing your portfolio based on breaking news.

The News and Your Portfolio

Reacting to daily news is bad for your investments. The market adjusts its pricing faster than you can. Two principles are at work here.

First, it’s less about an event happening and more about whether the market anticipated that event. The real factor influencing price is whether the news is better or worse than expected. If California’s hypothetical almond blight is reported to be spreading, prices won’t change sharply because the market was already prepared for bad news. A dramatic change may occur, on the other hand, if an effective new treatment is released that prevents further damage to almond trees, resolving the crisis.

So it’s not just news that influences future pricing – it’s unexpected news. Because market pricing is largely based on unforeseen events, it’s impossible to consistently outsmart the market. Investors who think they can beat the market by forecasting future prices will always be thwarted by group intelligence.

The Horses Are Out of the Barn

Another reason to disregard breaking news is due to something known as “The Barn Door Principle.” Because of today’s micro-second electronic trading speed, by the time the news reaches you, market prices have already been affected by it. Researchers have determined that price-setting occurs nearly instantaneously (with U.S. markets moving even faster) during the first few post-announcement trades. There’s simply no way to move faster than the market; the proverbial horses have already galloped out of the trading barn.

Ignore the Noise of the MarketBecause you’re competing against automated traders who respond to breaking news in fractions of milliseconds, you’ll always be at a disadvantage. In fact, trying to respond immediately to breaking news will often affect your profits negatively, effectively causing you to buy higher or sell lower than those who have already set new prices.

The Bottom Line

We recommend a better way to position your portfolio. The evidence shows you’re better off opting out of the costly game of buying and selling based on rapidly-changing news. Instead, align your investing according to certain market factors you actually can manage to your advantage.

Before we look at those factors, you might be wondering why you shouldn’t just hire an expert to compete against the market on your behalf. Many investors who don’t feel like taking on the market themselves are attracted to the idea that a professional could do it for them. Let’s look at the problematic reality behind this seemingly attractive option.

Download the rest of the ebook “12 Principles of Intelligent Investors” by clicking here.

 

McLean Asset Management Corporation (MAMC) is a SEC registered investment adviser. The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.

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