Less Trading To Build More Wealth

Finance is an industry that produces more news than is newsworthy. I suppose this may be the case in other industries, but the amount of TV channels dedicated to finance is staggering. Bloomberg, CNBC, Fox Business, BNN, Cheddar, amongst many others, are producing “breaking”, seemingly actionable reports around the clock, featuring expert opinions and interviews to get you engaged. Further, print news publications, blogs, and twitter commentary on the latest developments also opine on every recent development. And as news cycles go, they are usually focused on negative, attention grabbing developments, which generate more engagement. As a casual investor, or even as a professional one, how do you sift through this sea of noise?

One easy approach is to only trade your portfolio on a monthly basis. This is a forcing mechanism to help you focus on the big picture of what you are trying to accomplish with your portfolio. If you only have one shot a month to trade, are you doing it because of an interview on Bloomberg TV from an investor that doesn’t know your personal situation? Or are you trading because of one of the hundreds of red breaking news banners that appears at the top of your web browser? Although perhaps personally interesting, these are not worthy reasons to modify your investment strategy in any way. And further, they are probably more negatively skewed pieces of information, which may cause you to unnecessarily de-risk your portfolio.

Most significant changes in the stock market can only be understood in hindsight, and most of the time, they are unpredictable. I think the two main causes of nasty bear markets are 1) A true shock that catches investors globally completely off guard (ie Coronavirus) or 2) An economy with excess supply that is met with fiscal and monetary policy makers restricting growth.

In the true shock scenario, by definition it can’t be predicted, so its generally not worth trying to trade your portfolio in anticipation of a shock. Just be mindful that with markets there are always feedback mechanisms, and shocks are almost always met with significant government intervention. So if you do nothing, you’ll have a wild ride, but will probably be made whole if you can stick with a longer term strategy and not panic.

In the fiscal and monetary tightening scenario, you have a chance to successfully de-risk your portfolio, but timing it perfectly will be impossible. What measure of tightening is too tight? Usually in this stage, the economy is booming, so it can be hard to de-risk, while everyone else is getting rich. Have some dry powder, but be mindful that it may take years for you to deploy it.

These are the big picture items you need to think about. While following every news headline is interesting and can provide some context, it rarely is a good enough reason to excessively trade your portfolio. Hopefully by using a simple strategy such as only trading monthly, or one of many other forcing mechanisms to sift through the noise and focus on the big picture of your portfolio, you can avoid interrupting the powerful force compounding can have on your path to building wealth.