The Signal and the Noise

Sam Swift, CFA, CFP®, AIF®

Nov 10, 2020

The title of this week’s post has been borrowed from Nate Silver’s book of the same name. Silver has become a household name to anyone who follows elections and politics closely, which makes it more appropriate for today. Since he’s in the political sphere, you may have strong feelings, positively or negatively, about him, but I’m interested in his expertise on the science of statistics and prediction. We’ll circle back to him and his book in a bit.

But first…how are you? I’m guessing most of you have been a bit more restless this week assuming you have been following the election results and the updating vote totals every couple of hours. Regardless of your preferred outcome, a nail-biter is bound to cause anxiety one way or another. It’s like watching a 4th quarter drive in the Super Bowl albeit with significantly higher stakes. Unlike sports though, where the anxiety that results in the agony of defeat or the exuberance of a win is kind of the point, I don’t think this is healthy for us. Let me ask you some questions.

Are you gaining anything from refreshing vote counts or checking in with cable news every hour? What if you lost all contact with the world for however long this takes to sort out and you just found out the end result? You’ll be upset or happy depending on the end outcome, but you certainly wouldn’t have had to deal with the constant anxiety. Why do we choose to bring on that anxiety? We don’t have control over the outcome at this point anyway, so why don’t we just wait and let the chips fall where they may?

By the way, I should mention that I have been asking myself all these same questions. I’ve been right there following along since Tuesday. I like to blame my job for needing to stay on top of the news (which is partly true), but the reality is I’d be doing this anyway. I’m just as guilty in this case.

I bring all of this up for a couple of reasons. First, intentionality is a consistent theme on this blog and I want to remind everyone to step back every once in a while and think about what you’re doing. To paraphrase Marie Kondo, the famed minimalist, “is it sparking joy?” Second, watching the minute to minute updates about the election has a strong parallel with watching daily stock market swings. They are both activities which have no value and we have no control over either. They only cause us to react (often emotionally instead of logically) when reaction is of little help and is likely harmful.

Our Natural Psychology

We posted about all of our inherent biases and how they can do harm to our personal finances, if we lack awareness about them. Most of those biases can be tied back to the idea supported by many evolutionary psychologists that we aren’t designed to handle uncertainty well. And yet, in a week (and year) like this, uncertainty is everywhere.

We seek out certainty because it is safe and secure, but that can also lead us astray as we’re biased to assume certainty even when it’s not there.

To circle back to the title of this post, the Signal and the Noise, Silver describes the two competing ideas as such:

“The signal is the truth. The noise is what distracts us from the truth.”

For the election, the votes are in and we’ll learn the truth once they’re all counted. Until then, there will be a lot of noise. It’s natural to seek out good news for whatever outcome you desire, but keep in mind there will likely be bad news too. Be intentional about what you’re doing, and I’ll remind you that though there are many real consequences to the outcome, the impact on your portfolio isn’t one to worry about.

For long-term investors, the signal is that a well-disciplined investment strategy will net positive long-term returns. The noise is the random short-term fluctuations that try to distract us on a daily basis.

We’ve had a lot of noise this week as expected. Heck, we’ve had a lot of noise this year! Hang in there and stay oriented towards the Signal.

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