By Robin Bowerman Smart Investing 20th June 2011 Principal & Head of Retail, Vanguard Investments Australia
A personal challenge for investors is to focus on their long-term goals without being distracted by the thundering noise that typically engulfs the market.
Countless economists, sharemarket analysts, fund managers and media commentators give differing forecasts for the markets. And many disagree about whether particular stocks or sectors are "buys" or "sells".
There is, of course, an essential difference between being an informed investor who follows a carefully constructed, long-term plan and an investor who jumps in response to the latest opinion.
As behavioural economists have said, investors can have a tendency to favour opinions that confirm their existing views or prejudices.
And Steve Utkus, director of the Vanguard Centre for Retirement Research in the US, has described in the past how investors tend to be over-optimistic in rising markets and to over-react "on the hint of bad news".
In a Sydney address late last week, former Reserve Bank governor Ian Macfarlane asked the rhetorical question: Do Australians get too much economic news?
"People with jobs like I had have always been at the receiving end of a lot of economic information," he told his audience, "most often from official sources like the Australian Bureau of Statistics, but increasingly now from private providers of survey information.
"Over the past couple of decades the general public has also been inundated with this type of information."
And the former Reserve Bank governor further asks: Does the mass of information make us better investors?
"Is it possible," he says, "that if we are inundated with more information than we need, we may not be able, as the old saying goes, ‘to see the wood for the trees'? Or another way of saying this is that we may be on top of the detail but lose perspective ..."
Some of the key ways that many experienced and successful investors deal with the wall of sound in the market include:
Setting a long-term strategic asset allocation, appropriate for an investor's personal circumstances, and then adhering to this asset allocation in a highly disciplined way.
Recognising the contribution that a proper long-term asset allocation can make to an investor's long-term returns.
Refusing to allow emotion to dictate investment decisions.
Paying close attention to keeping investment costs and taxes to a minimum.
Without doubt, astute investors take a disciplined attitude to dealing with the "noise" in the market.
