Five Ways To Cut Through The Noise
Any person exposed to any form of media can soak in multiple opinions each and every day, but despite the good intentions those with the opinions are not the ones making the final decisions for your portfolio.
Recently my wife and I had our first child and for the first time in many years, I chose to take some time off from the financial markets. What a great way to kick off fatherhood, as I believed getting my mind off of my work, and something that literally consumes me 24 hours a day, would be refreshing and allow me to concentrate on my expanding family.
Boy, was I wrong. Despite being away from the trading desk, I just couldn't get away from the market. It was everywhere. Each time I turned on my TV there was a financial report discussing Apple (AAPL) or Dell (DELL), or the local news guy discussing stocks of interest.
I would pick up the paper to read the local news, only to see front page headlines regarding how the housing market was sure to hurt the stock market, especially the financial stocks like Citigroup (C) or Goldman Sachs (GS), or that gas prices may hinder the consumer. I was literally amazed at the incredible market noise that surrounded me as I attempted to take time off, which was ironically more cluttered than when I remain focused at my own desk in my own domain.
As my mini-vacation was nearing an end, I started to think about how an individual who is not involved in the financial markets on a daily basis is supposed to decipher all of this information and make an informed decision. I found it extremely ironic, that I for one was clueless and confused by the time I found myself back at the trading desk. I pondered this further and thought it demanded some attention.
The fact is society today is littered with information. Any person exposed to any form of media can soak in multiple opinions each and every day, but despite the good intentions those with the opinions are not the ones making the final decisions for your portfolio. It is the individual who is ultimately responsible for their financial future.
Despite the fact that I am one who trades stocks day in and day out, and methodical investment management is no longer my cup of tea, I felt moved to compile a few basic guidelines that may just help a methodical investor navigate through the noise and land on that island we are all seeking called financial freedom.
Here are my five "noiseless" rules that I hope you will find helpful.
1) Turn It Down: Headlines draw us in whether they are in print or floating through the airwaves. Eyeballs or ears are what drive revenue so it is the pundit's primary job to grab your attention. Many wise people will tell you to gather as much information as possible, but I don't believe those who stated this quite understood all the information available to us today. Adopt moderation in your financial intake. Simply cutting back on the clutter will help you to keep things in perspective and strike a healthy balance between the unbelievable numbers of opinions that abound.
2) Stick With One Source: If you are reading this, chances are you gravitate towards financial information or opinions that may come from independent sources such as the 'Ville. There are many wise individuals out there that have navigated the toughest of seas. Find a friend or two and stick with them. They are in their position for a reason, but will not always get it right. Find one that you identify with, who writes or speaks for your demographic or life situation, and adhere to this person's advice for the long haul.
If you have all your investment money in a 401K, I wouldn't be reading a day trader. On the flip side, if stock picking fits your fancy, stay clear of those preaching the macro-economic scene. In my opinion giving a financial friend a five-year cycle to prove themselves is a must. Many people bail after the first wrong call, and never fully benefit from the vast experience of the individual. Stop hopping and find a friend.
3) Index It: I will leave this debate to Jeremy Seagle and those much smarter than I, but I do know that most people who fall into the passive camp could improve their results dramatically by just sticking with a few index-only vehicles.
An index is a basket of stocks that fall within a certain criteria. Most of the indexes are rebalanced each year, which means your portfolio will constantly be dropping the laggards and adopting the winners, a basic strategy people have the hardest time with. Furthermore, indexing today has been made so very simple through the use of ETF's or exchange traded funds. No longer does one have to utilize mutual funds and buy or sell at day end. They have the ability to purchase an index vehicle like a stock.
4) Add Rules: Once a person adopts the above mentioned strategy for all or a portion of their portfolio, I do believe a set of basic money management rules can easily increase your downside risk. Despite the fact that indexing removes much of the emotion and decision making from investing, it does not however limit the risk.
The market always undergoes cycles and regardless of who you are, you will not be immune to a nasty downward cycle that can last for months to years. Adding a simple set of money management rules, such as selling half of an index once it breaks its 50 day moving average, can help not only improve your longer term results but also preserve your emotional capital and allow you to sleep at night. This is not as cut and dried as an article on such rules is to follow, but adopting some set of money management rules, which a person religiously adheres to, will definitely help you to navigate the noise and improve your results.
5) Leg In, Leg Out: One of the most important rules I ever learned was to always buy in pieces and sell in pieces. The premise is that attempting to catch the precise bottom for a buy, or a top for a sell, is a fool's game and a waste of time.
While I never give out stock ideas to friends or family, this is a rule I always relay. Many people always struggle with how to invest and nail down the timing. Let me tell you a secret: you can't do it, so don't try. Sitting with heavy cash on the sidelines can be frustrating, especially when a market moves higher. At the same time, it can be torturous to see a portfolio drop each and every day and have no idea if now is the time to sell.
In addition to a basic set of rules as mentioned above, I believe each person should adopt a methodical and unemotional strategy for entering or exiting the financial markets. I often suggest a 1/3, 1/3, 1/3 strategy over the course of six months for someone who desires to put capital to work. Vice versa, selling something, would be done in a similar manner. This of course, should correlate with the rules you set above and despite any siren call or new noise, one should not break or alter these rules.
Many will read this and say how ridiculous it is to try and drown out the noise to improve your investing. Those thinking that I am quite sure are all engulfed in the financial markets and more than likely are responsible for creating some of the noise I am talking about. However, just as I took a few weeks to remove my financial hat and be just a normal Joe, it was almost impossible to get away from the noise and it would definitely cloud my judgment.
Navigating through the noise is key if you desire to achieve the financial goals you have set forth, and I hope adhering to a few guidelines is helpful. Good luck and go get 'em.
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