Are you getting signal or noise?
That’s what investors need to ask when they evaluate their portfolios. The “signal-to-noise” ratio is an engineering concept that compares the useful information received to false or misleading data. Everyone should want more signal and less noise. Noise is static on the line: the more you have, the harder it is to make effective decisions. So how do you raise the ratio?
First, focus inward. What do you want your investments to accomplish? If they’re there to help provide for your retirement 30 years from now, don’t get stressed out by day-to-day wiggles and jiggles. In fact, if you look at your 401(k) once every couple years, just to make sure your balance is right, that’s probably enough. On the other hand, if you want your portfolio to provide income, then look at your income stream—and the source of that income. If you have a bunch of high-coupon short-term bonds, you might need to diversify. But first, examine yourself.,
Second, reduce your distractions. Reducing noise is often a fight against habits. Things like daily news (usually old), talking heads (always self-interested), attractive stories (that contradict hard data), and market rumors (why are you favored with the inside scoop?) can lead to both overconfidence and personal panic. Pare down these meaningless distractions.
Finally, try to establish regular routines that allow you to cultivate an inward life. Jogging, meditation, prayer—even reading good literature—allow you to think apart from texts, tweets, headlines, and (dare I say it?) blogs. Such discipline is increasingly rare today. And what is rare is usually valuable.
Improving the signal-to-noise ratio is a big reason why I write every morning. It helps me think things through and sift the wheat from the chaff. So: how much noise do you face?
Douglas R. Tengdin, CFA
Chief Investment Officer