If you pay close attention to investment news, it’ll either make you laugh or it’ll drive you crazy. Within the same hour, the popular MarketWatch investment news website often runs completely contradictory articles. One says the market is headed higher; the next says the market is about to tank.
What’s a smart investor to do? Be very careful about how much and what information you take in.
Less is more
In the late 1980s, former Harvard psychologist Paul Andreassen conducted an experiment to see how the quantity of market information impacted investor behavior.
He divided a group of mock investors into two segments — investors in companies with stable stock prices, and investors in companies with volatile stock prices. Then he further divided those investors. Half of each group received constant news updates about the companies they invested in, and half received no news.
Those who received no news generated better portfolio returns than those who received frequent updates. The implication? The more closely you monitor news about your investments, the more likely you are to make changes to your portfolio — usually to your detriment.
In another study, renowned behavioral psychologists Daniel Kahneman, Amos Tversky, Richard Thaler, and Alan Schwartz compared the stock/bond allocations of investors who checked on their investments at least once a month against those who did so just once a year. Those who took in the least information about their portfolios made fewer investment trades and generated higher returns.
When Helping Hurts
One factor at work here is “loss aversion.” First quantified by Kahneman and Tversky, it’s the idea that people feel the pain of loss more acutely than the pleasure of gain. The frequent monitoring of investment portfolios brings every downward market move to the attention of investors, who tend to react by moving money into less risky assets (bonds instead of stocks), thereby locking in their losses. (For a related article, see Has Your Commitment to the Stock Market Wavered?)
Misinformation Is Not Power
Another factor has to do with the tales told in the investment press. Each day’s market performance is reported — what happened, and why. The first part is factual. The market either went up or down and by a certain amount. The second part is mostly opinion.
No one can say with certainty exactly what moved the market. Was it fear over the growth rate of China’s economy, a contraction in the oil supply, or that XYZ company missed its quarterly earnings projection by a penny? No one really knows. But that doesn’t stop the explanations from flowing across the pages of investment news sites.
Late December and early January are especially dangerous times to read market news. That’s when market forecasters spin their yarns, undaunted by their previous year’s miss or economist John Kenneth Galbraith’s famous scolding that “The only function of economic forecasting is to make astrology look respectable.”
When we pay attention to such forecasts — and even worse, we change our portfolios because of such forecasts — we do so at our peril.
You can’t control the stock market or what is said about it, but there are certain factors you can and should control, such as:
- Estimate how much you need to invest each month in order to accomplish your goals
- Determine your optimal asset allocation
- Choose a trustworthy investment selection process
- Add to your portfolio regularly
- Expect market turbulence
- Be very, very careful about what investment news you take in and how much
- Keep moving forward
Of the many factors involved in successful investing, selective listening may be the most underrated.
Take it to heart: “The wisdom of the prudent is to give thought to their ways, but the folly of fools is deception.” – Proverbs 14:8
Take action: Be selective about the investment writers you pay attention to. Because of my job, I’ve read investment articles from a lot of sources over the years and have figured out which ones to pay attention to and which ones to ignore. I link to some of the best every Friday on this blog, and a co-worker and I do the same every Friday at Sound Mind Investing.