Tag Archives: investing

Investing amid daily market noise

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“Don’t miss the donut by looking through the hole.”
— Author Unknown

Many investors prefer access to plenty of information as they seek to achieve their goals, typically funding for retirement. Some even want a deluge of information. I thought it was instructive to have a closer look at this investing approach.

For example, last week investors were treated to making sense of 19 major economic data releases, such as jobs, factory orders and consumer credit. This week that number drops to a mere 15 releases, followed by another 17 and 15 for the next two weeks. And that list just covers the US economy! Heaven help those who also feel like tracking China, Japan or Europe.

More data will soon be on its way with the release of quarterly earnings and future prospects for a bevy of companies. If this feels like taking on a herculean task, you are right. So, let’s deal with the key question: “Do you allow the volumes of daily noise to influence your investing?”

First a candid observation. Investors are very keen to find facts, figures, data, trends, people, information and institutions that agree with their existing views. Then they proceed to ignore all the other people and data that contradict their beliefs and positions. This is commonly known as “confirmation bias.”

Few investors have the courage to disregard the massive daily volumes of research, predictions, data and advice readily available from many sources. Those savvy investors know it’s best not to react to short term distractions coming their way each and every day. Call it market noise, especially, during large market swings.

So, let’s deal with the key question: ‘Do you allow the volumes of daily noise to influence your investing?’

I learned long ago that having oodles of information at your fingertips is simply not required.  One basic principle of successful investing is to ignore the daily avalanche of short term events. Investment experience will improve by paying more attention to your guiding principles.

Handling information excess


All investors display some level of confirmation bias. All of us believe we are open minded. However, the facts show that bias shapes the opinions we value. Yet, knowing about it and accepting that it does exist, helps make attempts to recognize it. That usually assists in seeing things from another perspective.

I suggest that adopting this approach is helpful: Remind yourself that markets are logical, while investors are emotional. Distractions of the day will tempt you to take your eyes off the ball. Hence, try not to get sidetracked.

  1. Keep your focus on your long-term goals and objectives. That is your top priority. After all, managing your money is a long journey, not a short sprint.
  2. Get ahead of the curve. Learn to be more proactive and less reactive. Develop your personal game plan that stewards your wealth. Then proceed to make it happen over time.

Think of it this way. If you start the investing process at age 30, it takes roughly 30 years to accumulate your nest egg. That leaves the following 30 years to enjoy spending some or all of it. Perhaps, also pass some onto your loved ones.

These 30-year ballparks are far too long for you to be preoccupied with chasing bias that does not work. You need to recognize that having information at your beck and call contributes little to you becoming a better investor

I recommend that your main task is to start turning off the sources of daily noise as soon as you can. Once this is accomplished, that feeling of liberation settles in over the nest egg.

I’m keenly interested in how you turned off the taps. A note is appreciated. Thank you.

Adrian Mastracci, Discretionary Portfolio Manager, B.E.E., MBA started in the investment and financial advisory profession in 1972. He graduated with the Bachelor of Electrical Engineering from General Motors Institute in 1971, then attended the University of British Columbia, graduating with the MBA in 1972. This blog is republished here with permission from Adrian’s website, where it appeared April 10th.

Quality is the Factor ETF investors should emphasize in today’s Market

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By the WisdomTree ETFs team
Special to the Financial Independence Hub
 

Investing is hard. Trying to time the market is harder. Timing return factors at the right time? Forget about it.

The past few years have seen some of the industry’s brightest minds publish papers concerning the feasibility of timing return factors. The conclusions have varied slightly, but most generally agree that when investing in factors, trying to determine which ones to invest in at a given time is an incredibly difficult undertaking.

However, most of these papers analyze factor timing from the lens of the valuations of these factors. What if we take a different approach and see if we can estimate which factors could outperform from the context of where we are in the market cycle?

Where are we now?

The U.S. equity bull market started on March 9, 2009. In the almost nine years since then, the S&P 500 has rallied nearly 400%.1 We are certainly not calling for an end to the bull run — in fact, the market environment still appears benign, and corporate earnings have remained strong — but it is certainly not a stretch to claim that we are closer to the end of the cycle than we are to the beginning of it.

As of this writing [mid-February], we are in the midst of the longest period without a 3% pullback in the history of the S&P 500.2 With implied and realized volatility hovering near their all-time lows, it seems reasonable to expect more choppiness — if not an outright correction — coming in the next few months. Based on what we know from history, what factors tend to outperform in the late stages of market cycles?

Factor performance prior to market corrections

Factor Performance Prior to Market Corrections

Late-Stage Outperformers: Momentum, Quality

Dating back to 1990, there have been ten distinct 10% corrections in the S&P 500,3 with bifurcated results in the months preceding the correction. In the lead-up to the downturns, momentum and quality stocks have seen consistent excess performance compared to the market, whereas the size and value factors have generally underperformed.

These results provide an interesting backdrop for today’s market. If we are indeed late in the cycle, and the market dropped 10% tomorrow, this trend would hold true once again. The MSCI Momentum Index and MSCI Quality Index have outperformed the S&P 500 over the last 12 months (by 1,700 and 320 basis points (bps), respectively), whereas the Russell 2000 Index and Russell 1000 Value Index (well-known small-cap and value indexes) have both lagged by more than 700 bps.4

While it is interesting to look at what factors worked well, we think it is also important to analyze what didn’t. If size and value lagged, one can conclude that their complements — large caps and growth companies — outperformed as a result.

Factor performance during market corrections

Factor Performance during Market Corrections

Quality: The best of Factors in the worst of times

Shifting our focus to the market corrections themselves, when the S&P 500 fell at least 10%, it is clear that quality was the most desirable factor by a relatively wide margin. Intuitively, that makes sense—when there is stress in the markets, high-quality companies should help protect investors during market downturns. Encouragingly, the factor excess performance was largest in the most severe market sell-offs (with the quality factor having captured only 74% of the market downside during the tech bubble and 81% during the financial crisis).

Again, value underperforms here, with size and momentum each having relatively more mixed results during market corrections.

What are Size and Value good for? Continue Reading…

The 5 worst financial decisions you can make

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 By Alana Downer

Special to the Financial Independence Hub

Sometimes when it comes to your finances it can be difficult to know if you’re making the right decision. What bank account should you pick? Should you buy a car outright or pay it off as you go? Are you eating too much takeaway? Every day we have to make decisions that affect our finances and some are harder and more consequential than others. In fact, sometimes one small financial decision can have a lasting impact on the health of your bank account. Here are the five worst financial decisions you can make, so you can avoid making the wrong choice in the future!

1.) Spending more than you earn

Overspending is probably the number one money mistake that you can make. You cannot build wealth or be financially secure if you are spending more than you’re earning. By spending money that you should be saving you are doing serious damage to your finances and stalling your financial progress.

It’s true that not everyone has high-paying jobs or huge inheritances, but this doesn’t mean you can’t build up healthy savings by simply monitoring your spending. Part of spending less than you earn means putting effort into living below your means. Track your spending and take a hard look at your spending habits. Are you buying two or three coffees a day? Do you pay a lot of money every month for a gym membership you don’t use? Or perhaps on a bigger scale, you have a huge house or luxury car that you just don’t need.

2.) Never Budgeting

Creating a budget goes hand in hand with learning how to spend less than you earn. A budget is a blueprint for financial success. Without budgeting, it is nearly impossible to keep track of your expenses and ascertain whether or not you are spending more than you should. By creating a budget to follow week-to-week or month-to-month you can stay on top of your finances and prevent yourself from making financial decisions that you may regret.

When creating a budget, it’s a good idea to look at your whole year and the payments that you have to make, such as your rent, your bills, your car registration and cost of transport. Use bills, your bank statements and receipts to help you understand all your expenses. Once you’ve figured out roughly how much you spend over a certain period, figure out your net income (i.e. the money deposited in your bank account each pay period). Subtract your expenses from your income and what is left should be what you aim to save.

3.) Not creating an Emergency Fund

Many people have the mindset that bad things won’t happen to them and that if they do, they will find some way to deal with it when the time comes. This is not a financially intelligent way to think and could leave you in serious trouble if something goes wrong. An emergency fund is exactly what the name suggests, a bank account that can you use in the case of an emergency without having to dip into your savings or rearrange your budget. It is money set aside specifically for use when things go haywire.

Continue Reading…

Is fear keeping you out of the stock market?

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The biggest concern for many investors is the fear of losing their money. The stock markets have shown some volatility the last few weeks, and the recent screaming headlines in the financial media do nothing but encourage panic.

Some people think the latest bull market has overvalued stocks and a major market meltdown is imminent. They are sitting on their cash and waiting for the right entry point.

According to a BlackRock survey, 70% of adults aged 25 to 36 are also clinging to cash assets. Apparently, these Millennials don’t have much trust in the stock market and are afraid of another large market crash. This puts them at risk of not having enough saved to enjoy a comfortable retirement.

It’s true. Investing in equities does carry risks. Market corrections (drop of about 10%) are common. Bear markets (drop of 20% or more) will likely occur during an investor’s lifetime.

Even a reasonably diversified portfolio of stocks lost about half of its value during the 2008-2009 market crash. However, avoiding equities completely isn’t the best strategy. The stock market can be good to investors who have the discipline.

What can you do to get over your stock market fears?

1.) Educate yourself

Combat your fears with knowledge. Learn the basics: how the markets work so you can prepare yourself for future market conditions. The more you know, the less afraid you become, but avoid information overload.

Stop reading the gloom and doom reports in the financial media. Your financial education should not come from the news media. They need something to report and tend to sensationalize short-term market events to grab our attention. Just because something appears in print doesn’t guarantee that the information is correct. Look for reliable sources.

Investing magazines and books can provide useful information.

Knowledge is freely available on the Internet. Basic investing information is available at sites like Get Smarter About Money and Canadian Securities Administrators. Some social media sites, forums and financial blogs are worthwhile if written by knowledgeable authors.

Lack of confidence and second guessing yourself can paralyze your decision making. If you’re afraid of picking the wrong investments, turn to a professional for help. You could also try one of the many well-publicized model portfolios that have yielded good returns.

2.) Take a long-term investing approach

The biggest fear of investing is losing a lot of money in a short period of time.

Investing is a long-term process and is most likely your only way to reach your long-term financial goals.

Consider the benefit of investing sooner rather than later. Time is on your side.

Don’t keep monitoring your portfolio. This is psychologically hard, but don’t let short-term losses bother you too much. No one likes losing money, but it will be temporary. You’re not going to need this money to survive tomorrow, or next month, will you?

Acknowledge short-term market risks, but trust in long-term historical gains and commit to long-term investments. Continue Reading…

Even more rookie mistakes that seasoned investors make

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By Neville Joanes

(Sponsor Content)

Even though we all “knew it was coming” the precise timing of the market correction this month caught quite a few seasoned investors by surprise. Hey, it happens. No one can predict where the stocks go all the time. But how did you respond? Did you sell along with the herd — and lock in your losses? Or did you see this as a buying opportunity? How were you prepared for it in the first place?

Even the most experienced investors can get caught short in times like these. Recognize your investing biases that can lead to bad decision-making — and learn from them. Here are a few more that we didn’t cover last time. (See 3 rookie mistakes that seasoned investors still make.)

Confusing the familiar with the safe

Disney, Coca Cola and Starbucks are big brands. But are they safe, or even good investments — by virtue of their size?

Just a few years ago, you might have gotten the same feeling of rock-solid reliability about Nortel, Blockbuster or Kodak. Or Sears. Pan Am airlines. Netscape. Pets.com Or hundreds of other companies with billions in their war chests …  that aren’t even around today. By last year, just 60 companies remained from the original Fortune 500 list.

Investors have inherited the illusion of stability and power from size, possibly from our origins in hunting wooly mammoths with wooden spears. The big guys are hard to take down (we think). So even experienced investors will throw their money at blue-chip stocks and other institutional-style investments. It’s a half-baked hedging strategy.

When you have this bias, you don’t do the proper due diligence you would with other investments. Why look too closely, when the trading megafauna like Amazon or Apple just keep bounding onward and upward? Because the bigger they are, the harder they fall.

A big-name brand is not necessarily a bad bet. This is where a strategy of diversification comes in. By planting seeds in a range of investments instead of a single big-name brand, you’re in safer territory. Continue Reading…