IFA of the year: Listen to reason instead of noise

Scottish Mortgage Trust manager James Anderson is close to Mark Zuckerberg due to staying invested in Facebook. Picture: AP
Scottish Mortgage Trust manager James Anderson is close to Mark Zuckerberg due to staying invested in Facebook. Picture: AP
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It pays to have a level-headed expert on your side if the chatter of market speculation and scare stories becomes deafening, writes Jeff Salway

THE age of 24/7 news and information poses a challenge to all investors, from hobbyists to fund managers – knowing when to block out the “noise”.

Last month, it was the collapse in oil prices, the (related) Russian economic crisis and the US Federal Reserve’s promise to be “patient” when it comes to interest rate increases. This month, there will be different themes, but almost every day investors come across fresh information on developments that may, or may not, have implications for them to consider.

Part of the job of a financial adviser is to understand what’s important, and what they can block out. In many cases, this will involve explaining to a worried client why they shouldn’t be panicked by market volatility. Filtering the useful information from the noise is no easy task for investors. Those who make a hobby from investing can spend days sifting through stories and figures.

A few years ago they might have read the Financial Times in the AM, listened to the news on the hour and, if they were particularly serious, logged into their Bloomberg terminal. Now it’s virtually impossible to keep on top of all the investment-related feeds on Twitter, and there are myriad websites and blogs offering tips and commentary on investing.

Reacting to the latest information by tweaking your portfolio (again) may feel exciting, but it’s almost certainly counterproductive, not to mention potentially expensive. Yet it’s one of the most common mistakes made by the growing army of DIY investors running their own portfolios through fund supermarkets and direct-to-consumer platforms.

The temptation to react when you’re overloaded with information can be difficult to resist, especially when it’s so easy to log on to your account and make a change that may, initially at least, make you feel like you’ve taken positive action.

The best fund managers are often those who recognise noise for what it is. James Anderson, manager of the Scottish Mortgage Trust, has long maintained that “ignoring the noise” is essential in successful investing.

Those who are distracted by the City noise will inevitably fall short of expectations, according to Anderson, whose long-term perspective has proved very effective for what is now the UK’s biggest investment trust. The reason Anderson has access to Facebook co-founder Mark Zuckerberg, for example, is that he stayed invested in Facebook when others were walking away.

Harvard’s Shawn Achor argued in his book Before Happiness that investors who are able to ignore the constant noise to which they’re subjected are more likely to find success. He identified four different types of noise – unusable, untimely, hypothetical and distracting.

My guess is that DIY investors are particularly vulnerable to the third variety. Hypothetical noise includes speculation around events that might happen. We all know that predictions are largely useless, if not downright dangerous, as they can be quite seductive to investors eager to know which way the wind is blowing.

You may also recognise Achor’s description of noise that is unusable – that which, while seemingly significant, has no impact on your long-term strategy.

A huge amount of information could be considered distracting, especially the kind that involves market pundits warning darkly about some imminent armageddon. We know only too well from the financial crisis that the most significant events often occur when the loudest commentators are looking the other way or wilfully ignoring the signals.

Alan Steel, a regular contributor to these pages, frequently talks about the need to focus on the fundamentals and ignore the incessant chatter and the negative headlines. Steel often refers in this context to Warren Buffett, who’s offered an array of eyecatching quotes on the broad theme of differentiating between what’s important and what can be classed as mere noise.

He maintained during the banking crisis that “over the long term, the stock market news will be good” and also noted: “In the 20th century, the United States endured two world wars and other expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

It’s fair to say that Buffett tends to get it right far more than he gets it wrong, so his advice is worth heeding. Oil prices look set to cause volatility for some time to come, while May’s General Election could also unsettle markets. We can be certain that there will be more events and news over the coming months that will set investors’ nerves on edge and wondering how they should react.

The same goes for IFAs, but that’s where they can come into their own. In a year when pension investors will be given the freedom to do as they like with their savings, independent, expert advice will be more valuable than ever.