Signals, noise, and the risks that matter
- “When you’re constantly looking for a catalyst to explain every single move in the markets, you start to see signals and correlations that just don’t exist. Much of the time we won’t know exactly why the markets moved a certain way until much later. Sometimes even with the benefit of perfect hindsight, investors still can’t agree on the specifics of the cause and effect. But to some the ‘why’ in the markets will always seem easy after the fact, so they keep searching for the answers.” —Ben Carlson, author of the AWealthofCommonSense.com blog, in a 6/30/15 post on the futile search for a market narrative.
- “Now, consider the stock market’s signals and noises. Its performance gets measured every moment of every day, down to a tenth of a point. That’s a lot of noise, and we often confuse it for a signal. The most common example has to be down days versus up days. If the market goes up, the non-rational part of our brain hears the noise of that higher number and thinks, ‘Oh, that’s a signal to buy.’ If the market goes down, the same area urges us to ‘Sell, sell, sell.’
But what if—and maybe this is a silly idea—we didn’t do anything? Or, what if we at least didn’t do anything that wasn’t based on a plan? What if we ignored the noise and instead focused on signals that related to us personally?” —Carl Richards, “Sketch Guy” blogger at the NY Times, in a 7/13/15 post on the importance of managing investments based on a personal financial plan, not the day’s financial headlines. Read the full article.
- “There are two forms of risk that really matter. One is whether you understand a given investment as well as you think you do. The other is whether you’ve correctly anticipated how you’ll react if your analysis turns out to be wrong.” —Wall Street Journal columnist Jason Zweig on why standard measures of investment risk matter less than the risk of an investor getting in his or her own way.
Something to sell
- “The 2008 recession drove a number of companies out of business, but it was a boon to a very specific corner of the financial media. The meltdown empowered the perma-bears who make a living scaring investors into sub-optimal asset-allocation strategies recommended by their $49.99 monthly newsletter. Armed with marketing materials celebrating their brilliant recession calls, this group has spent the better part of the decade since terrorizing gullible and risk-averse investors with more recession predictions.” —Michael Johnston, Senior Analyst at Fund Reference in a 7/16/15 post detailing 25 doomsday market predictions since July 2010. Read the full article.
Putting things in perspective
- “On a global scale, just 13% of the world’s population could be considered middle income in 2011, according to a new Pew Research Center analysis. Most people in the world were either low income (56%) or poor (15%), while only 9% lived at an upper-middle-income standard and 7% were high income.” Find out where your income places you.
- “The rout in gold prices is telling us that the world is changing. Gold is usually sought when inflation starts to heat up. When the economy first emerged from the Great Recession, gold rose in price, figuring that inflation would eventually rise…It did not work out quite this way. Instead of heating up, inflation actually cooled off. When gold buyers caught on, they dumped the precious metal…The current plunge has brought gold prices down to levels not seen since the last recession.” Irwin Kellner, chief economist for MarketWatch, writing on 7/28/15 on gold’s recent fall to its lowest level in almost six years. Find out his reasons why.