[Editor’s Note: Do not read this article as a recommendation to invest in Exchange Traded Funds. Like all investments, ETFs have risks. At times, the ETF market can also be prone to ‘market noise’ as ETF issuers launch thematic and other funds that provide exposure to latest themes and trends, and promote their merits. Talk to a licensed financial adviser or do further research of your own before acting on information in this article].

The recently-published ASX Australian Investor Study 2023 made for some excellent reading. One finding was that Australia had welcomed 1.2 million new investors since 2020, taking the number of Aussies investing to 10.2 million. Welcome to the club, friends.

That’s a staggering number of people investing and trying to stay ahead of the market. These are people from all walks of life. They are young, old, male, female, new investors and experienced investors.

One thing that caught my eye in the report was the lack of trust cited by these investors. Specifically, they said their greatest investing challenge is that they don’t know which information to trust when it came to investing (at 34% of all respondents).

For most investors, knowing where to turn for trusted information can be daunting. There is a plethora of information and financial propaganda bombarding people on where and how to invest.

You don’t need to look further than the nearest bus stop advertising, billboard or nightly television news. That’s in addition to the rise in the number of ‘finfluencers’ and other commentators that we find across podcasts and social media.

My comments here are not meant to be taken as a disparagement of these commentators (for there are some very good commentators), rather, these 34% of investors are right to highlight the lack of trust as an issue given that there is so much market noise.

Of course, the irony is that my piece here is just another bit of information that could also be considered noise. That is why I will also share statistics to show what has worked and how you can benefit from market noise.

What is market noise?

It might be helpful to define what market noise is. This depends on where you look and who you ask. A common definition of market noise is news, data or activity that clouds out genuine information from reaching an investor.

A simple analogy is that of the television static (those fuzzy black and white dots and loud noise) that was common on the old CRT TVs when searching for a channel. That static is a diversion and makes receiving and understanding credible information (the TV signal) difficult.

What investors need to look for are genuine market signals that will help them to make an informed decision. Reducing noise to enhance the clarity and quality of the intended signal, and separating this market noise from genuine market information, is the key to enjoying a successful investing journey.
 

Why is there more market noise?

There is more market noise due to the rise of technology. Many years ago, most people would get their (localised) information from the town square or local coffee house. News took time to travel and reach other people. Then came newspapers and radios that provided more people with access to more information.

With the advent of television, then the internet and now social media, people can receive information continuously, 24 hours a day, 365 days a year and all via their desktop computer, tablet or mobile phone.  

There is no shortage of sharemarket newsletters, tipsters and financial commentators to get your daily dose of financial wisdom. It’s important to remember that most of these financial commentators and businesses make money when you act on their buy and sell recommendations and few of them profit if you simply set-and-forget for the long-term.

Financial news is biased towards ‘noisy’ commentators recommending that you should buy or sell – this is because recommending a long-term, buy-and-hold strategy simply isn’t newsworthy, in Stockspot’s opinion.
 

Dangers of market noise?

There is an immense temptation to get caught in the hype and buy/sell when financial commentators are hysterical and markets are rising/falling. 

Buying/selling everything is never the right long-term decision and will mean you could miss the markets rising again, in Stockspot’s opinion.

By buying what commentators are selling, you could very likely get caught up in the hype and swept up with the latest investing fad. As we showed in Stockspot’s 2022 ETF research, investors got caught out to the tune of $100 million, in one year alone, by buying the latest niche/trendy thematic products.

The danger of selling, when you should instead stay invested, is that you miss out on the returns when markets do rise again. Those that exited when the market was down from its lows in June and September 2022 and didn’t buy back in, would have missed out on returns of more than 10% for the year ending 30 June 2023. Those that stuck it out have been rewarded.

Investors should be aware that financial experts, economists and commentators can get their calls wrong as often as they get them right. As The Australian Financial Review demonstrated recently, not a single bank economist correctly predicted the RBA’s interest rate decision across three consecutive board meetings. Even flipping coins would have had a better success rate!

Even following professional money managers has its risks. More than 80% of Australian fund managers have underperformed the index over 15 years, according to 2022 research from the S&P Indices Versus Active Funds (SPIVA) Report. 

The results are even worse in the US where 92% have delivered lower returns than the S&P 500 index. Which goes to show that even professionals have a tough time knowing where to invest successfully and for the long-term.
 

Can you take advantage of market noise?

This need not be gloomy news for the average investor. If anything, it’s a positive!

What I believe most investors should do to block out the noise and earn consistent returns is get diversified by owning the entire market via an index fund or Exchange Traded Fund that tracks all shares and multiple asset classes. These ETFs can be easily bought and sold on the ASX and offer exposure to Australian shares, international shares, emerging market shares, bonds and even physical gold.

These ETFs are proving popular growing to around $150 billion in value and as the latest ASX Investor Study highlighted, are now favoured by around 20% of investors, up from 15% in 2020.

The other thing investors should be doing is building their discipline to ignore the noisy commentariat and let your portfolio continue to work for you in the background. Have a long-term investing outlook, say a minimum of seven years, and let your broad market ETF do its thing.

Investing is one of the few areas of life where the less you do, the better the potential results, in Stockspot’s opinion. You don’t need to stay up-to-date with the latest market news to succeed – you just need patience.

The best way to remain sane while investing is to ignore short-term moves altogether. This allows you to separate the signal (upward trend) from the noise (random moves around that trend). 

Only when you block out short-term moves and zoom out to longer timeframes does the upward trend become obvious and it becomes easier to sleep at night!

DISCLAIMER

Stockspot Pty Ltd ABN 87 163 214 319 is a licensed Australian Financial Services provider (AFSL 536082) regulated by ASIC. Any advice contained in this article is general advice only and has been prepared without considering your objectives, financial situation or needs. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate taxation and legal advice. Investing into financial products involves risk. Past performance of financial products are no assurance of future performance. Please read our Financial Services Guide on stockspot.com.au before deciding whether to obtain financial services from us.