There are three types of investors: momentum, valuation and noise. Momentum investors care about price movements, valuation investors care about fundamentals and noise investors care about a random assortment of stuff. Many of us are noise investors, even though we won’t realise it.

Of course, investment approaches do not all neatly fit into such discrete categories. Most are a combination of momentum and valuation, and every investor lets some noise into their world. The critical question is – how much is market noise impacting our behaviour?

The more influential noise is, the more inconsistent and unpredictable our decisions will be. When observing the choices made by a noisy investor it will be difficult to discern any recognisable pattern.

This is not a path to good investment outcomes.

Why is noise such an overwhelming issue for most investors? There are two factors at play. First is the sheer amount of ‘information’ available to us, which means that we face a constant struggle to understand what is important and what is immaterial. Second is our reaction to this torrent of stimulus. If we don’t define what is consequential, we will act like everything is. Is that GDP print important? What about that conflict in the Middle East? What about that technological change?

Noisy information leads to noisy behaviour.

The key differentiator between a noise-influenced investor and a momentum or valuation-led investor is that the latter group will have a far more clearly defined idea of what information matters and how they are likely to react to it.

That doesn’t mean that valuation and momentum approaches are inherently good, it is just that they are less noisy. An investor with a process that involves buying the best performing mutual funds of the past three years is momentum-focused but not noisy. It is still a very bad idea, just not one beholden to market noise.

Noise-driven investment behaviour is incredibly destructive, but it is almost certainly how most of us act. Why is it so hard for investors to avoid being captured by noise?

1) We are surrounded by it: It is close to impossible to switch off from the slew of financial market news and information. It is all-encompassing and overwhelming.

2) It is heavily incentivised: While noise may be bad for us it is fantastically lucrative for many in the industry – noise means clicks, trading, turnover, spreads and commissions.

3) Everything feels important in the moment: We tend to judge the importance of something by how available or prominent it is. Even if an issue has no real relevance for our objectives or over our time horizon, it will feel very much like it does.

4) Other people think it is important: It is incredibly hard to ignore subjects that everyone else is treating with the utmost significance. We will either look naïve or negligent, perhaps both.

5) Noise is exciting: Financial market noise is fascinating and, at times, exciting – engaging with it is stimulating and enjoyable. The trick is to be interested in it, without letting impact our investment decision making.

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It is vital to acknowledge that our default state is to succumb to the allure of financial market noise. Once we have done this, is there anything we can do about it?

The starting point is to define the things that we care about. What matters most given our investment approach and objectives? Anything that is not in this list we can categorise as unhelpful noise.

(There is no objective list of what constitutes ‘noise’. One investor’s noise will be another’s essential information – it depends on what we believe and what we are trying to achieve).

We also need to take an active approach to blocking out market noise. All investors should be thinking carefully about how we can disregard things that are not likely to be influential, even when we know that at times they will feel crucial.

Being complacent about the amount of superfluous noise in financial markets is not a viable option, if we don’t find a way to guard against it, it will quickly come to define our investment approach.

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).