Investing should be all about the long-term. Yet almost everyone who grabs our attention when it comes to investing – media pundits, asset managers, brokers – have an incentive to keep us guessing about the state of the market, and the performance of individual shares and funds.
- Magazines and websites want us to tune in and ideally pay up to hear the latest news and views.
- Fund managers want us to recognise their apparent skill and then switch to their funds.
- Brokers want us to trade our holdings. And then to trade them again.
- Even non-financial companies may benefit from a febrile atmosphere if they need to tap the markets through rights issues, IPOs, or spin-offs.
Heck, even the tax man would probably prefer we churn our portfolios. In the UK most share purchases are liable for stamp duty tax, and most investments sold for a gain outside of ISA or pension face capital gains tax, too.
Whatever you do, don’t do it
There are big problems with being too concerned about the meanderings of the stock market when you’re a private investor.
Active investors who are overly obsessed with day-to-day market noise and commentary are more likely to feel the need to do something – which usually means trading shares or swapping funds their around.
Too much of trading increases expenses and will likely reduce your returns. And most of the time, when people swap funds they are chasing performance, which can have a damaging impact over the long-term, as they repeatedly sell low and buy high.
Yet even passive investors can suffer if they’re partial to
weather reports and horoscopes stock market updates and analysts’ commentary.
A well-balanced asset allocation can be derailed if you react to some super-smooth pundit opining about asset classes, touting that “only a fool would own government bonds right now” or claiming that “This is surely a once in a lifetime chance to invest in the Democratic Republic of Congo!”
Then there’s the worst fate of all – being scared out of your positions at the bottom of a bear market, and missing out on the rebound.
Stick to the plan, Stan
Sticking to your long-term plan is vital for success, as this video from Sensible Investing TV explains:
As Vanguard founder Jack Bogle says:
“Why in the name of peace do we pay any attention to the stock market? The stock market is a derivative.
The stock market is a derivative of what? It’s a derivative of the earning power and dividend yields on, in the case of this nation, US corporations.
The dividend yield, plus the earnings growth that follows, is what creates the fundamental return on stocks.
The speculative return on stocks, compared to that investment return, is how much people are willing to pay for a dollar of earnings.
That carries the market up and down, and in the long run, in the last 100 years, the contribution of speculative return to total market return is zero.
The contribution of investment return, if you happen to have 4.5% dividend yield and 4.5% earnings growth, that’s the 9% you read about in the past for the US market.
Bogle’s conclusion? The stock market is a giant distraction to the business of investing.
Most people are best off ignoring it like you’d ignore the tantrums of a greedy and tired child, and letting long-term compound interest work its magic.
Check out the rest of the videos in this series.