JOHANNESBURG – It is understandable for investors to feel jittery in the run-up to the national elections, but giving too much air time to market noise is never a good idea, says Allan Gray’s Rob Formby.
Whenever elections approach, market uncertainty increases. Pre-election jitters knocked the Business Confidence Index in March to its lowest level since August, according to the SA Chamber of Commerce and Industry. It dropped to 91.8 in March from 93.4 in February, with load-shedding, the electricity tariff hike and a slump in manufacturing weighing on the index.
“The first quarter of 2019 has been characterised by a lot of market noise,” says Rob Formby, chief operating officer at Allan Gray. “There’s been political noise as parties gear up for the general elections, noise generated by our energy-supply crisis, the noise around crucial policy decisions and economic noise around South Africa’s growth figures.”
How to identify market noise
But just because it grabbed headlines doesn’t mean all information is helpful. “It’s important that investors recognise when information is not useful and then tune out of it in order to make better long-term investment decisions,” comments Formby. In defining noise, he refers to the work of Harvard researcher Shawn Achor who provides four categories to identify noise.
1. Is the information useable?
“If an event has no effect on your long-term investment strategy – in other words, you can’t use it – then you should disregard it,” says Formby.
2. Is it untimely?
Similarly, if the information is likely to change by the time you’re ready to use it, then it’s noise. “A good example of this is short-term market returns,” he says. “By the time you can use the information to decide whether to invest, the market may have already turned the other way.”
3. Is the information hypothetical?
It’s a good idea to ask yourself this question if the information is based on what someone thinks might happen, such as economic predictions. “If it is, then you should discard it,” comments Formby.
4. Is it distracting?
Again, if the information distracts you from your long-term goals, then you should ignore it, Formby believes. “The information we receive can have a significant impact on our outlook and, ultimately, our decisions – even without our being aware of it. It is essential to learn to recognise when information is not useful and filter this out or ignore it.”
Stay the course
Formby notes that investors should guard against making changes to their portfolios in response to short-term market noise; rather changes should be made in a considered manner a result of a change in personal circumstance or a revised investment objective.
“Switching funds in a knee-jerk reaction to short-term market conditions can impact your investment success over the long term by locking in losses. This inevitably destroys the value of your investment.
“If you can sit tight and ride out the volatility, you will have a better chance of enjoying long-term returns,” he concludes.
BUSINESS REPORT ONLINE