I grew up on a dairy farm in Wisconsin before the advent of the internet and cable TV. We received a local daily newspaper, but most of the news — and certainly the stock quotes — were a day old. The daily stock market performance maybe received 30 seconds on the national news each night.
Although my parents weren’t invested in the stock market at the time, presumably they would have had to rely on a stockbroker or visit the local library to receive more in-depth stock market or individual company news.
Compare that to the information environment today. Cable TV and social media provide instant market news and “analysis” on nearly every event. There are countless “experts” sharing their opinions on every conceivable topic, investment-related or otherwise.
Can we have too much information?
The rise of the internet and cable TV channels dedicated to the stock market have ushered in a number of wonderful benefits for investors, but does all of this information help us make better decisions? Is the average investor so overloaded with information that they don’t know what to do?
While it’s unlikely most investors would want to return to a time with less readily accessible information, one has to wonder whether all of this information makes us better decision makers and investors.
The benefits of greater access to information
There are a number of obvious benefits to having more investment-related information:
Immediacy: We can now learn information about an investment immediately rather than waiting potentially days. But one corollary of this is that everyone else is also better informed.
As a result, markets have become very efficient as all the relevant information is available at roughly the same time to all the market participants. This has “flattened” investment performance; it’s very difficult for anyone to “beat the markets” or their competition consistently if everyone has access to the same information at roughly the same time.
Transparency: There is much more transparency, allowing investors to conduct their due diligence before making investment decisions. Fees, conflicts of interest and other important information are disclosed and readily available.
As a result of this transparency, costs of investing in general have dropped as investors demand lower fees on mutual funds and for commissions on trades. Commissions for products like annuities and life insurance, once little discussed, are now better understood by the investing community.
Knowledge: There is a wealth of knowledge available at our fingertips. Articles like the ones we write for our blog, OneBite®, that share both technical knowledge about the markets and the psychology of successful investing over time help investors become more knowledgeable and successful.
To be clear, we don’t equate investor knowledge with anyone on social media who is touting the latest investment fad. (Click here to understand the difference between investing and gambling in the markets.)
Too much information can potentially harm investment results
Does all of this information help us make better decisions, though?
There are a number of reasons why all of the information may not be as helpful as it may first appear, particularly for those with less financial knowledge.
Biases: The idea that all this information is helpful ignores the biases that we all still bring to understanding information. Many people simply focus on information that confirms their pre-existing opinions or views. For example, an investor may refuse to invest in foreign stocks even though the evidence shows that it is better for the investor to include foreign stocks as part of a well-diversified portfolio.
Distractions: We are bombarded daily with the latest economic and market news on corporate earnings, interest rates, inflation, bond yields, home sales and the like. While this type of information can help an investor understand economic trends and data that affects the markets in the short term, it may distract one from the important personal financial decisions that need to be made or can simply make one fearful to invest at all.
Paralysis: We can become paralyzed by all the choices. With so much information and so much “advice” from talking heads on TV, it can be hard to make decisions.
Research shows that many people have a hard time making decisions when too many options are available (known as the “paradox of choice phenomenon”). One study summarized that there are four factors that contribute to information overload concerning investments, namely: 1) how information is presented to investors, 2) the number of investment options given, 3) the similarity among those options and 4) the financial knowledge of the investor.1
The study highlights the difficulty that many people have in making decisions between choices that often look similar. Not surprisingly, the study concludes that those with low financial knowledge are more likely to feel overwhelmed by the information and search for the easiest choice (for example, the “default” option in a 401(k) plan) or to do nothing, which in many cases may not produce the best results for them.
What should an investor do?
What can an investor do to try to block out too much information and focus on the important issues?
Stop trying to control investment results: Many investors spend significant amounts of time and energy trying to find the perfect investment and to time the markets. Trying to do this is about the illusion of control, not actual control of investment outcomes. Investors must recognize that there simply is no way to control stock market returns or volatility. Instead, ignore all the predictions and embrace market uncertainty.
Evidence shows that no one can consistently accurately predict the future or timing of market returns — no matter what the talking heads on TV imply.
Focus on what you can control: Focus your time and energy on what you can control: how aggressive you are in your portfolio, the costs of your investments, the tax impact of your choices, how much you spend, how long you plan to work, etc.
Work with your financial advisor to understand when you can retire comfortably and all the other financial decisions that directly impact YOU. After all, that is what should be important to YOU, not whether the federal reserve might raise interest rates by 0.25% three months from now or whether your favorite stock beat its latest quarterly earnings estimate.
Ask questions: If you are working with a financial advisor or you are a participant in a 401(k) plan and you want to learn more about a particular investment option, ask questions. The advisor is there to provide you with information and advice about the investments. You are paying them for their knowledge and advice, so don’t be afraid to ask questions.
Be patient and disciplined: We believe the odds of being a successful investor earning positive returns in the stock market are very high over time. Don’t chase the hot stocks in the news that you know nothing about. Stop looking at your portfolio results every day, particularly when markets are down. There is no benefit to doing so and is likely just to lead to more stress and distraction.
Instead, try to take some of the stress out of investing by letting the markets work over years of time with a global, well-diversified portfolio that fits your risk tolerance. By doing so, you will naturally focus more on your important personal financial issues and not get distracted by the day-to-day market headlines.
If you need assistance crafting a diversified portfolio or even achieving the patience and discipline necessary to maintain a long-term investment strategy, reach out to an advisor at Wipfli Financial.