Successful investors learn to tune out the news

Bull market. Recession. Scandal. The latest economic trend.

The financial media is built around the idea that you can successfully time the market. The hundreds of prognosticators more than happy to tell you (and everyone else) what to buy and sell and when to do it.

But there’s a problem with this premise. The ideal time to act is before news becomes widely available. Once that announcement, report, or scandal has hit the airwaves, your chance to outsmart investors has passed.

Although many investors enjoy following the news, the process can be time consuming. Others find the constant flow of news, to be stressful and they would give anything to be able to block out the news, especially the negative news that the media thrives on.

Why successful investors ignore the news

What enables successful investors to sleep at night, secure in the knowledge that their investments are safe?

Their asset allocation plan (a fancy term for diversification).

Diversification simply involve balancing your comfort with risk against the need to own a bit of everything.

A balanced asset allocation plan divides your investments between:

• asset classes (stocks, bonds, & cash)
• types of stocks (different industries and varying company sizes)
• different regions (Asian, European, etc)

The plan doesn’t have to be complicated to be successful. Scott Burns’ Couch Potato portfolios and Bill Schultheis’ Coffeehouse portfolios are both easy enough for novices to understand and implement.

These portfolios will also beat most of the strategies advocated in the financial media. Given a few years, they’ll return more than almost every strategy you’ll hear touted.

How can this be?

A good asset allocation strategy seeks to approximate the market’s return through low-cost index funds. This doesn’t sound like much of a strategy until you consider that approximately 70% of mutual fund managers fail to beat the market.

Your asset allocation plan will save you time too. Most active investors spend a lot of time and money moving in and out of different funds and stocks. Passive investors, however, invest according to their asset allocation plan regardless of the stock market’s whims.

While some investments will stall or even lose value, other investments will simultaneously rise, bringing stability to a passive investor’s holdings.

More time, less stress, and higher returns

If you still find yourself craving financial news subscribe to this blog, read a good book, and explore some personal finance and investing blogs.

The Wisdom Journal, Chance Favors, Greener Pastures, and Plonkee are good places to start learning how to make the most of your time and money.

Photo by stephen boisvert