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Should you trust the media today for your investing news – or is the signal lost in the white noise?

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Should you trust the media today for your investing news – or is the signal lost in the white noise?

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3 minute read

You live in the time of peak noise. Countless television channels and 24/7 news, the radio, newspapers, and the Internet. To say nothing of your family, friends, or work colleagues.

Talking-head ‘experts’, endless opinion pieces, feedback loops, interviews. It’s not only your morning coffee that comes skinny and light.

As this short piece will argue, achieving clarity means identifying the signal within the noise. Too often, white noise, the sum of all sound, hides the message carried by the signal.

In fact, the key message is often hidden, and more closely concerns what’s not said.

When it comes to investing your life savings well, rewards come from paying attention.

Industrial noise

In industrial settings, health-and-safety rules demand that appropriate protective gear is worn. This includes ear defenders in high-decibel environments.

Yet, when we turn to the health and safety of investment, you have little to rely on except the hackneyed phrase: ‘Past performance is no guide to future performance’.

How, then, do you protect yourself from the noise of the financial markets, particularly when investing without an adviser?  

In fact, global investment markets are especially ‘noisy’ places, and ear defenders should be a priority.  Given that these markets are pretty efficient at incorporating information into prices, they move quickly on the release of new data.

You may be wondering what returns will be like from company shares (equities) in the final months of 2020, and perhaps next year too. Actually, nobody knows for sure, and if someone claims otherwise, don’t trust them.

Chart 1, below, shows asset-class returns since 2006. To illustrate the range of performance, the S&P 500 Index is the Large Cap proxy. During these fourteen and a half years, returns ranged from +32.4% to -37%.

The chart shows the amount of visual ‘noise’ that exists. As you can see, the results follow no clear or predictable pattern.

Control your own behaviour

The only ear defenders that you have are behavioural. Keep your own investment horizon in mind at all times - a horizon that may extend two or three decades into the future. Accept that investing is a ‘two steps forward and one step back’ process.

Don’t look at your investment portfolios too frequently. Once a year should be enough. In most cases, ignore the television news and the sensational headlines.

On 12th March 2020, for instance, ITV gave us the following headline –

"FTSE 100 loses 10.9% of value in biggest fall since 1987 crisis as coronavirus concerns grow"

Nearly £150 billion had been wiped off London's top index as markets fell. Spreadex analyst Connor Campbell said:

‘A horror show US opening turned an already very bad day into the kind of session that could go down as historic, if for all the wrong reasons.

‘It is hard to keep coming up with new metaphors for the scale of disaster facing the global markets.

‘Equities are getting crushed underfoot as investors flee to the fire exit, desperately scrambling about for safe havens that feel anything but.’

If that headline and that quotation could be heard, they would be loud and relentless. And highly negative.

It’s not easy to identify good financial news on the Internet in 2020. And yet it is there. After the fall in March came the rebound in April. The FTSE All World Index grew at the highest level in nine years. Our own UK FTSE 100 Index had its second-best April in 10 years. In the US, the Dow Jones had its biggest lift since June 2000, and the S&P 500 climbed by 12.7%, the largest monthly increase since 1987 and the third largest since WWII.

While you very likely heard all the warnings of doom earlier on, you probably heard much less about the sudden recovery. Good news doesn’t sell.

Table 1, below, shows that on a decade-by-decade basis, the variance in equity returns is both ‘noisy’ and significant.

Decade

High

Year

Low

Year

Annualised

1970

+55%

1975

-25%

1974

+7.80%

1980

+40%

1986

-10%

1987

+23.9%

1990

+30%

1999

-30%

1990

+11.9%

2000

+25%

2005

-24%

2002

+0.20%

2010

+27%

2013

-6%

2011

+12.3%

 

Source: MSCI World Index (gross) in GBB terms

Patience and resilience are a necessity for investing success. 

Over this period, global developed equity markets have delivered a return of +10.9% on an annualised basis before inflation, and +6.5% after inflation (but before costs). 

To put it more simply, anyone who stayed the course over that time would double their purchasing power every 12 years. With that kind of long-term return, we think you can sleep fairly soundly at night. In other words, no need to let that market ‘noise’ disturb you unduly.

If you want more information on discovering the investing message, please contact one of the team at hello@capital.co.uk. 

 

 

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