[Today we’ve got ourselves a guest post from my friend Syed over at The Broke Professional. Hope you enjoy it as much as I did! If you’re interested in guest posting, check out my guidelines and shoot me a message.]
We live in a very LOUD world. I’m not just talking about the volume on the TV, but the constant assault on our senses from the moment we wake up to the moment we fall asleep. After shutting our cell phone alarms off, what’s the harm in checking some emails or looking at our friends latest Facebook escapades. Then, on the way to work we are listening to the radio or something on our phones, and many people are stuck behind a computer screen for most of the day. Exposure to social media and just regular web browsing occurs throughout the day.
Most of what we experience during the day is “white noise”, stuff that we hear or experience but is ultimately useless. I would argue that most of the things we experience throughout the day is white noise, because it doesn’t ultimately help us achieve our goals. This is very apparent in the investing world. Jim Cramer’s show Mad Money is the epitome of white noise, as he destroys and throws various things on set to tell us his “picks of the week”.
It is extremely important to limit this white investment noise, or even avoid it altogether. Here are some reasons why:
When the stock market is doing well, people tend to buy more stocks. When the market is declining, people tend to lessen their stake in stocks. Essentially, they are buying high and selling low, which is the OPPOSITE of a sound investing strategy. In order to maximize returns, you need to buy low and sell high. But if you listen to investment shows, you are going to be led astray. That’s because in order to boost their network’s ratings, they love to exaggerate the highs and lows of the markets. They enjoy making hot and sexy stock picks, not basing their picks on any sound information. Listening to this incessant investment noise will keep your returns low and make you skittish at every change in the market. That doesn’t sound like a very fun life. [Editor’s note: It’s also interesting to note that Jim Cramer is usually dead wrong, like when he told everyone Bear Stearns was completely fine the week before it failed and triggered the 2008 financial crisis. How does this guy still have a job?]
Wastes your time
Unless you’re a day trader, any money you put in your retirement or investment accounts should be for long term use. Listening to the “latest stock picks” does not allow a long term view. They want you to go in and out of stocks and mutual funds so everyone is making money except you. Historically, the stock market has gone up and it continues to do so. This means a long term buy and hold strategy will maximize your returns while keeping risk relatively low. It also leads to a very low stress investment strategy, giving you more time to actually live your life instead of having to constantly pay attention to the latest stock reports. This peace of mind can be priceless.
In nearly every financial transaction, Uncle Sam would like their cut. This is no less true (or complicated) than in the investing world. To keep things simple, I will just mention the major tax levied on investment gains: capital gains taxes. Essentially, there are two types of capital gains taxes, long term capital gains and short term capital gains. Short term capital gain taxes are always higher than long term capital gains. By definition, long term capital gains taxes are levied if you sell an investment after holding onto it for more than a year. By constantly following the news and trying to find the next hot stock to pick, you’re putting yourself behind the eight ball in terms of taxes, even if you end up getting higher returns. Taxes are always there lurking in the background, so it’s wise to keep them in mind when investing.
Makes investing more expensive
As the saying goes, “If you want to cross the bridge, you have to pay the toll.” This is very true in investing, as every transaction carries a fee paid to someone. The more you listen to investing talk shows on the radio and TV, the more you will get the itch to move in and out of investments. Every transaction you make will carry a fee, and most of the “hot” mutual funds usually have high expense ratios. Using a buy and hold strategy not only keeps your investment fees to a minimum, but usually leads you to mutual funds that have lower expense ratios than average. Similar to the effect of taxes, even if you achieve higher returns by getting lucky with stock picks, you might give back most of those gains in the form of trading fees.
Investment noise will hurt you
Investing early in life for a secure future is one of the most important things you can do for yourself and your family. Unfortunately, those who produce and host investment programs don’t have this idea at heart. In fact, they would rather you watch their shows and risk your future earnings in order to make themselves and their networks more money. It’s important to recognize this and be able to filter this white noise out of your life, because it can be disastrous to your financial health.
Syed is a full time optometrist who loves writing about personal finance at TheBrokeProfessional. He enjoys reading and writing about student loan debt, credit card rewards and investing. He’s also a big time New York Giants and Knicks fan, as well as a big time father and husband.