If you are like many investors out there, you get easily confused over all the jumble of available investing information. For starters, you have three television channels dedicated to full-time business news. Add to that countless newspapers, magazines and radio stations, and it’s easy to see how the average investor can become confused. Unfortunately, it doesn’t stop there…I haven’t even mentioned the internet! While it can be a great source for gaining information, the internet is the definition of information overloads.
How about this: here are the number of “hits” I received from Google when searching for the following terms:
- Stock Market Forecast: 56.8 million results
- How Should I Invest in 2013: 1.28 billion results
If that isn’t overwhelming, then I don’t know what is. Just think for a minute; you place a search to see if you should invest in a particular stock. The first result tells you to invest. The next result tells you to avoid the stock and buy something else instead. The third result tells you to wait it out. Which recommendation do you follow?
With all of this information coming at you, it is easy to lose sight of your long-term investing goals and give in to short-term volatility.
Good Advice vs. Bad Advice
This is only part of the problem.
You still have to differentiate good advice from bad advice. Unless you already know their previous work, you can’t be sure if the person telling you to do X is providing you with good advice or not. Likewise with market predictor Y and Z. Because of this, many investors rely on talking heads, a.k.a. “experts” on CNBC or Fox Business Channel. They listen to them because they are well-dressed, articulate and have good credentials. While on the surface it seems like a good idea to listen to them, it is in fact a horrible one.
The reason is simple. The “expert” on the television is telling you that stock ABC is a buy right now. It may be a “buy”, but for whom? He or she has no information about you as an investor. He or she doesn’t know your situation, your goals or values. It could be superb advice for John but the complete opposite of what Harry should do. By blindly listening to the advice of the experts on television and ignoring your own goals and values, you are going to build a portfolio of uncoordinated investments that most likely will ruin your chances of attaining your goals, not improve them.
Here’s an example: Bob is 80 years old and has a portfolio consisting of 80% bonds and 20% stocks. The expert on TV tells Bob about four great stocks are that set to pop. Wanting to cash in, Bob takes a chunk of his portfolio out of bonds and invests it in the recommended stocks. Regardless if the market moves up or down, Bob just went against his long-term plan. He is taking on more risk than he is comfortable with.
If the market drops, Bob is going to lose a good amount of money, get scared and sell out, costing himself thousands. If the market rises, Bob feels great. He either keeps riding the wave until the market drops and loses thousands, or he gets over-confident, listens to this expert and buys more stock setting himself up for a disappointment when the market drops.
So what do you do in this day and age of investment news overload? To begin, you need to develop a long-term plan. Determine what your goals and values are as well as where you want to be financially in the future. Next, invest in a well-diversified portfolio according to this plan. This portfolio should include low cost mutual funds, ETFs and bond funds for starters.
From there, you have to block out the short-term volatility or “noise” as I like to call it. Listening to this noise makes you emotional and when emotion enters into investing, you as an investor lose. You need to tune out the noise. This is more easily said than done.
You have to remind yourself that over the short-term, markets rise and markets fall – sometimes by great amounts. But you need to stay firm in your belief that over time, the market will recover from the losses and will rise. The chart of the stock market below proves this. There is always short-term volatility in the stock market. What you need to learn to focus on is the long-term trend of the market, which is up.
Keep reminding yourself that you are investing for the long-term. Not next week or four months from now, but 20, 30 or more years from now. Therefore, what the market did today doesn’t matter – it’s a moment in time. If you turn on the news and see them talking about the stock market, turn the channel. Do your best to walk past all of the magazines telling you how to invest. Tune it all out. The more you distance yourself from the noise, the more likely you will be to not give in to it. Even one of the best, if not the best investor of our lifetime advises this. Below is a quote from Warren Buffett in October 2008:
“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
If you can keep your focus on your long-term goals and what you want to achieve, you will improve your chances of success greatly.
Jon writes for MoneySmartGuides, a personal finance blog that helps educate people on personal finance so that they can reach their financial dreams. He focuses mainly on investing and paying off debt since those are the two of the most challenging personal finance topics we face.