What happens when we’re driving and we reach a red light? We stop, right? When the light turns green, we hit the gas. If we don’t, it usually doesn’t take long for the driver behind us to start honking the horn.
Anyone who has survived driver’s education (or sitting in the back of a taxi) knows we’re inclined to connect certain behavior with red and green lights. We’ve gotten so used to certain signals, in fact, that sometimes we forget to consider whether the signal truly requires us to act or has somehow managed to confuse us.
For instance, the light may be green, but what if a crazy pedestrian crosses the street in front of us? We don’t keep going. We stop, wait for that person to reach the other side of the road, and then go.
So the real signal to go isn’t the “noise” of the green light. We need the signal of an empty road in front of us and a green light. Saying, “But the light was green,” isn’t the best excuse for hitting a pedestrian, even if it may ultimately keep you out trouble.
Now, consider the stock market’s signals and noises. Its performance gets measured every moment of every day, down to a tenth of a point. That’s a lot of noise, and we often confuse it for a signal. The most common example has to be down days versus up days. If the market goes up, the nonrational part of our brain hears the noise of that higher number and thinks, “Oh, that’s a signal to buy.” If the market goes down, that same area urges us to “Sell, sell, sell.”
But what if — and maybe this is a silly idea — we didn’t do anything? Or, what if we at least didn’t do anything that wasn’t based on a plan? What if we ignored the noise and instead focused on signals that relate to us personally?
Of course, if you don’t have a simple financial plan guiding your overall strategy, this experiment will prove a little tricky. For now, though, let’s assume you do have one. Let’s say it’s built on the weighty evidence of history, your goals and your values. What signals does your plan tell you actually matter? I’m betting it’s not the daily movement of the markets.
In my experience, a well-designed plan relies on two signals. First, there would need to be a change in goals or values before you bought or sold stock. Second, there might be a change that you had actually scheduled, like selling stocks and buying bonds when stocks have gone up. In both instances, how the markets are moving and what the talking heads are reporting are not signals to act. Instead, you’re weighing what you said you wanted to happen five years ago with what you want to have happen right now or five years from now.
Did you decide that you really love your work, and retiring in a few years just doesn’t make sense anymore? That’s a signal to change your plan. As part of your investment strategy, did you decide to keep your portfolio divided 70/30 between stocks and bonds? If your portfolio value now measures closer to a 65/35 split, that’s a signal to rebalance.
These signals are personal. They’re based on what’s happening to you, not what’s happening in China or Greece. But we’ve grown used to the idea that when markets move, they’re a signal for us to move, too. In most cases, we’re better off ignoring the noise and doing the exact opposite.
This commentary originally appeared July 13 on NYTimes.com
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