Signal and Noise (Part 5)
So how do you decide?
When a news event occurs, is it a new signal, or is it just noise? The European Central Bank cut the rate they pay banks for their reserves to negative 0.1% -- is it signal or noise? The National Association of Purchasing Managers issued a report yesterday, then corrected it twice, indicating that US manufacturing is still expanding – was that signal or noise?
It’s tempting to label all these interim economic reports financial static. And a lot of them are. So much data comes at us from so many directions that it’s hard to decide what we should care about. Consider inflation: two government agencies report three different indices, each of which has dozens of sub-groups. Or employment: it’s measured two different ways, and each indicator has both leading and lagging elements. If you look too closely, you could drown in all the disclosures!
If you’re involved in the markets, your attention should be determined by your perspective. If you have a long time-horizon—saving for retirement while in your ‘20s or ‘30s, or establishing a young child’s college fund—you should perhaps keep an eye on broad trends, but that’s all. Regular saving through all the ups and downs will probably be your best approach.
Similarly, if you’re drawing regularly from your nest-egg and most of your assets are committed to short-term bonds, the market’s squiggles and jiggles also shouldn’t affect you much. But when you’re in the middle—still saving, but getting closer to needing the funds—then the news will have more impact. A change in the economy’s direction might call for a change in your tactical allocation. Still, even then, looking at the trends and averages of major indicators makes more sense than trying to watch every release.
In the end, whether a report is signal or noise depends on your perspective. One investor’s warning sign is another’s annoying distraction. But even the Federal Reserve—our most economically sensitive agency—only reviews policy every other month. That’s more than enough for most investors.