The noise we don’t ignore

Inflation is destroying wealth and making food more expensive.

The Federal Reserve Keeps Raising Interest Rates: How Can The Housing Market Survive?

The 16th largest bank in the US went bankrupt a few months ago. Then the 14th largest bank went bankrupt!

The COVID-19 pandemic happened. That sucked. Now there is a stupid war in Eastern Europe.

The stock market hates everything.

Let’s not forget the crypto-crash and that guy Sam Bankman-Fried (aka Scam Bankrun-Fraud). And that other guy Sam and his artificial intelligence robot are going to take all our jobs!

Now Congress is about to default on the national debt, again. WOW!

We can’t take a break.

short and shallow

The way we consume information has changed in recent decades. The evening news, newspapers and magazines were our main sources of information about the world around us.

But the evening news lost audience to the 24-hour cable news. As Internet access expanded, we switched to reading newspaper articles on our computers, updating every five minutes when we were bored at work.

Cable news became three-minute video clips on websites. Magazine articles became blog posts. The letters turned into emails. Phone calls turned into text messages.

Soon, social media became a competitive news source. What our high school friends had for dinner became more interesting than the latest international conflict.

Social networking moved to mobile devices when the iPhone arrived.

Blog posts turned into Facebook posts and tweet threads.

Videos of reasonable length became short, TikToks, and reels, of which we only see the first five seconds.

A larger portion of the news and content we consume these days is shorter and more superficial, quickly skimming headlines, silly memes, dancing cats, and dating prospects.

Do you remember when someone mentioned something and you said: “Yeah, I heard about that. I saw the headline but didn’t read the article.”

Superficial consumption of so much information freshens up more negative news in our minds. What we see lacks the context and critical thinking necessary to understand it.

We make critical decisions based on this superficial information.

The availability bias

A man recently committed a violent crime in the parking lot of a big box store near my house. A passerby shared a video of the ordeal online.

I talked about it with some neighbors and they all agreed that we would not go to that store anymore, for now.

This week, we might be feeling sensitive about going to that store because of violent crime.

But when I need my Bran Buds in a few weeks, I won’t pay $7 a box at Safeway. I go to the place that sells it for $4, even after that heinous crime happened in the parking lot.

Bad things are always happening in our communities and in the business news. We hear more about them now because our eyeballs collect such a wide web of information.

We make decisions based on this information because it is at the tip of our brain, not because it is logical.

Psychologists call this availability bias.

In psychology, the availability bias is the human tendency to trust information that comes easily to mind when evaluating situations or making decisions.

Due to this bias, people believe that easily available information is more representative than it really is. The availability bias, also known as the availability heuristic, is just one of several cognitive biases that hinder critical thinking and, as a result, the validity of our decisions. Relying on this information helps people avoid laborious fact-checking and analysis, but increases the likelihood that their decisions will be wrong.

Steven Pinker, author, cognitive psychologist, and Harvard professor, had this to say on availability bias:

Another quirk of human nature is called “availability bias”: our assessment of risk and danger is driven by available episodes from memory, not representative data. If you ask people if we are living in an increasingly dangerous environment or an increasingly safe environment, they will think of the latest terrorist attack and conclude that life has become more dangerous, instead of going to FBI crime data. violence, which in fact has shown a decline in 25 years.

The availability bias is particularly poisonous when it comes to investing.

zoom out

There was a time when I would sit at my office desk and listen to CNBC on satellite radio all day.

Not surprisingly, I bought and sold a lot more stocks back then.

I think a lot less about the stock market these days because as the length of my investment horizon increases, so do my chances of success.

Conversely, short-term thinking increases the chances of making mistakes.

By simply zooming out to view a longer timeline and avoiding noise in our investment decisions, we can mitigate the likelihood of dismal returns relative to the market.

The US stock market performs consistently over the long term, as long as investors don’t try to time it.

There is always noise that forces investors to sell shares. When your investment horizon is years, not weeks, noise is irrelevant to investing.

Financial advisers might recommend temporarily raising the bond-to-equity ratio when the market shows signs of fragility.

Despite the recent popularity of short-term Treasury yields, stocks still outperform long-term government bonds.

Therefore, if your investment horizon is longer than five or seven years, no temporary adjustments are necessary. Keep your default stock-to-bond portfolio ratio and keep adding new funds.

Contrary to what investment gurus and internet doomsdays pollute your social media and online advertising sources, US stocks outperform gold and silver.

And even though housing has gotten so expensive everywhere, stocks still outpace home prices.

The stock returns on these charts would only have realized for individual investors if they owned a large and diverse section of the stock market over the years and didn’t sell, regardless of the noise.

That means having the strength to hold stocks after the October 1987 crash, the dotcom boom and bust, the 2008-2009 banking crisis, and COVID 2020.

Periods of big falls are always followed by periods of big rises. If you don’t hold stocks on those big profit days, you’re missing out on market returns.

Since the market is unpredictable, we cannot anticipate big moves up or down. Successful market timing requires luck; eventually, we all run out of it.

Consistent investing during periods of fluctuation means buying at both the highs and the lows.

Dollar cost averaging causes us to buy more shares when prices are relatively low and fewer shares when prices are relatively high.

Doing this for several years consistently is a widely accessible and reliable formula for building wealth.

Conclusion

The era of short, superficial information consumption is not being reversed. Headlines and snippets from social media dominate our attention, putting us at risk of distorting decisions.

The tendency to rely on readily available information can lead us astray, as it often doesn’t represent the whole picture.

This bias can extend to our investment decisions, where short-term thinking increases the likelihood of making mistakes.

We can avoid the noise by walking away and investing with a long-term perspective. The consistent performance of the US stock market over decades highlights the importance of conserving investments and resisting the temptation to time the market.

Featured photo via DepositPhotos used under license.