Market noise refers to explanations offered by experts for short-term movements in stocks, sectors, or the overall market. Market pundits’ explanations are often accompanied by suggestions of exactly what to do to profit from their compelling explanations. 

Market noise is everywhere – from alerts on your phone to financial TV channels dissecting every market fluctuation. This noise is harmful to investors for two main reasons: 

1) It convinces investors to believe that short-term market movements can easily and routinely be explained (when they can’t).

2) It encourages investors to make short-term decisions (and often overreactions) with assets intended for their long-term financial goals.

Broadcasting a Coin Flip

Would you set alerts on your phone or watch a daily TV show to hear analysis of a coin flip game? Imagine commentators explaining why the last flip was heads or tails and predicting the next flip. Sounds ridiculous, right? Yet, this is essentially what market analysts do every day. Despite their convincing explanations, daily market outcomes over the past 70 years resemble a coin flip. From 1950-2019, the S&P 500 had 54% “up” days and 46% “down” days. (BTN Research)

Long-term Returns are Different

While daily market results might seem random, the long-term picture tells a different story. Over the same 70-year timeframe, the S&P 500 has been up 66% of all quarters and 73% of the years, with an average annualized return of over 11%. So, while any given day in the market is a coin flip, long-term investing has proven to be much more rewarding. One more reason investors should look at their portfolios less frequently.

Timing the Market? More Downside than Upside

The data shows that trying to time the market based on short-term movements is a gamble with about a coin flip’s chance of success. (Whether that success is due to skill or luck is a different conversation.) But when considering longer timeframes, investors are at much greater risk of missing out on market gains than they are of successfully avoiding market losses.

The Randomness of Market Noise

Nassim Taleb’s book, “Fooled by Randomness,” highlights the hidden role of chance in life and markets. Taleb advises against the constant urge to find patterns in random events. Ever had a superstitious sports “friend” (not you) who believed their action of sitting on a certain couch or drinking a certain beverage influenced the game? This type of sorcery happens daily among financial experts finding patterns where none exist. Talib’s work reminds us to ignore market noise and treat daily fluctuations with much greater indifference.

The Bottom Line

The up-and-down nature of markets is a fundamental part of investing. Attempting to explain every market turn is impossible and terribly misleading for long-term investors. It’s also the favorite pastime of financial media, making this lesson so important for investors. 

2024 could be considered the year of market noise as we prepare for the onslaught of presidential election coverage and what it means for investors (or doesn’t mean – more on this topic soon). 

More importantly, based on historical data, long-term investors don’t need to pay attention to every market hiccup to be successful. In fact, paying attention to market noise less can help investors win more. Instead, investors should focus on what truly matters – their long-term financial goals and the aspects of life that give these goals purpose.

Castle Quote: “If it won’t matter in 5 years, don’t spend more than 5 minutes worrying about it.” – Unknown