Investment information overload

The technology revolution has made it easier and easier to track our investments, and perhaps suffer from investment information overload. Within this revolution, some of the news is balanced, but a lot of it is not.

Human nature is naturally cautious because our brains evolved at a time when we had to be on the lookout for physical threats. As a result bad news always attracts more interest and so “bad news sells”. Of course, this also applies to financial news. But it also feeds into a common behavioural trait called “myopic loss aversion.” And here lies the threat to our long term financial health as a result of investment information overload.

When the value of an investment falls it makes sense that unless something has fundamentally gone wrong investors should be thinking about increasing their allocation to it to take advantage of it now being cheaper and better value and therefore offering better return prospects. The reality though is that many are motivated to do the opposite as the distaste for loss combines with another well-known behavioural trait called “recency bias” that causes investors to give more weight to recent events than they should so they project recent news of falls in their investment into the future.

The information overload we are now seeing is likely to be reinforcing this because it is increasing our exposure to news about our investments. And this constant feedback is likely adding to “myopic loss aversion”.

By contrast if you only look at how the share market has gone each month and allow for dividends the historical experience tells us you will only get bad news (ie a loss) 35% of the time in Australia and the US. The key I think is to find ways to turn down the volume on financial news because if you are exposed to it less frequently you are less likely to make decisions that are contrary to your long term investment goals.

…for the whole article please go to the following link from AMP Capital’s Head of Investment Strategy and Chief Economist, Shane Oliver.

Investment Information Overload