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Don't Be Swayed by Noise in the Markets

Posted on: Thursday, September 27, 2012

As the September issue of the SmallCap Informer hit the press, the markets and economy were showing signs of relative stability (if not yet displaying signs of out-and-out strength).

Small-cap stocks performed well in August 2012. The Russell 2000 posted a gain of 3.4% for the month, bringing the year-to-date performance of the index to 9.0%. Of course, in the year of a presidential election, markets often tend to rally, as neither party wishes to take a stand that might impair the performance of the markets or anger investors. The market rebounded from its late-summer slump in fine style, and small-cap stocks were included in the rally.

Of course, these observations don’t give us any clue about the potential performance of any individual company, or about the future of the overall market, or how any investor’s portfolio is likely to act. In fact, there is evidence that focusing on the noise of day-to-day market workings can be detrimental to your portfolio.

In Your Money and Your Brain (How the New Science of Neuroeconomics Can Help Make You Rich) by Jason Zweig, the financial writer explains how people who keep up with the news about their stocks earn lower returns than those who pay almost no attention.

That’s right: In a study done at Harvard University in the 1980s, psychologist Paul Andreassen found that among buyers of more volatile stocks, those who ignored the news earned more than twice as much as the news junkies.

Certainly, there is something to be said for diligence in portfolio management, but there’s a fine line between monitoring your holdings and obsessing over them. Investors who are focused on small changes in their holdings, who tally up their gains and losses daily, who can’t let a few hours pass without checking their brokerage account balances — these investors are being swept up in the misconception that all the “news” that’s reported daily, all the changes in a stock’s price, all the mentions of the stock by some pundit in the media, actually “mean something.” For a long-term investor, these tidbits of data are merely noise in an increasingly noisy market.

News flash: You don’t need the Internet or an iPhone or Twitter or an online brokerage account to be a successful stock investor. Sure, they make the tasks of investing and researching stocks easier, or more convenient, or less expensive, but the basics of fundamental analysis are unchanged in several decades. We use the same principles in the SmallCap Informer that have served investors well for years.