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White noise: Great for babies, not so good for investors

Advisers must do their best to avoid the latest round of buzz words.

White noise is broadly defined as the combination of sounds of all different frequencies together, typically being used to mask other sounds. Among the most common uses of white noise is to help babies (and adults) sleep without background noise. Whilst highly powerful for this purpose, one could easily make the opposite conclusion when it comes to investment markets.

Returning from a short holiday, the first in over two years, among the most daunting tasks is opening one’s emails for the first time. There were no fewer than 888 unread emails, not including the few that were responded to during a moment of weakness. Many financial advisers, and other professionals for that matter, have responded to stay at home orders by simply working more. But a few days off brings everything back into context.

There is seemingly more noise in the market than ever before. 2022 started with a fixation on increasing short-term inflation, the threat of potentially significant rate hikes and another round of ‘super bubble’ forecasts. As the threat of higher rates was digested by the market, without the massive bear market many predicted (so far at least) the noise has shifted to geopolitical risk.

  • Australia’s relationship with China is in focus once again, as is Russia’s invasion of Ukraine. Whilst many suggest the risk of the latter will only be localised, it is contributing to what is already an extremely difficult landscape for investors. As I have highlighted many times in the past, most prognostications of the future are wrong and significantly so, with the threat of higher bond rates a case in point.

    Yet despite a track record of very few correct calls, analysts, stock pickers, economists, journalists, myself included, continue to forecast the impossible. It offers little hope to the individual or DIY investor of achieving success, yet as history has shown, staying invested over the long-term is only proven approach to delivering returns.

    The ‘consensus’ continues to switch from one asset class to the next, which would drive anyone to change their portfolio on a daily basis. The prevailing view that commodities will win in an inflationary environment may well be tested by the fact that said commodities and their production is contributing to inflation. Energy prices and shortages could be solved or worsened by any number of issues, whilst companies with the ‘power’ to increase prices today may well be met with weaker demand in the future.

    Investors and advisers must be as wary as ever of the ‘white noise’ afflicting markets and do their best to avoid the latest round of buzz words. We must extend our memory beyond the last 12 months and focus on what companies, asset classes and managers have said and done over the longer term.

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