Broker Check

Information Overload: Tune Out Non-Stop Investment News


Darren L. Zagarola, CFP®, CPA, PFS

As published on Princeton.Patch.com, March 6, 2013

Information comes in all shapes and sizes. The Internet, 24-hour-a-day news and business-only news channels delivered via television, radio, and satellite, magazine covers, charismatic television show hosts, and worst of all, your friend at the dinner party with the awesome investment portfolio. How can the average investor manage all this information (and misinformation) and make appropriate decisions about their investment portfolio? The old axiom is “Information is power!” Is it really?

Ask yourself these questions: Where do you get your financial information? From whom do you get it? And what role does media play in forming your investment portfolio?

When evaluating economic news, separate statistics from commentary and consider the source of the information. Statistics provide facts: “Unemployment fell to 9.4 percent in December, the lowest level since May 2009.” Commentary is much different: “The economy created far fewer jobs than expected in December.” Both statements may be accurate, but the commentary includes opinion or judgment in the analysis. When one considers the source of the information they receive, they must remember that most news is filtered. It is the job of any media outlet to attract more people to watch, listen or read in order to sell advertising. Most often, analysis is skewered to fit the commentator's objective, whether it be political, employment-related, meant to shock, to sell books or to self promote. When the market is not performing well, certain words are used frequently to illicit a specific response: “Panic… Fear… Plunge!” Magazine and newspaper columns are recycled asking the question: Are equities dead?

This overload of information can have an impact on one's portfolio returns, especially if investors listen and try to react to what is being said. Reacting to your portfolio emotionally leads to selling an investment at a lower value when you feel anxious or fearful and to purchasing investments at higher values when you are optimistic about the markets. This is called market timing and is very bad for one's portfolio. The 2011 DALBAR annual Quantitative Analysis of Investors Behavior shows that the average annual return of the S&P 500 (the large cap equity index) for the 20-year period ending December 31, 2011 was 7.8 percent, which was more than double the return of the average equity investor over that same period, which has an annual return of 3.5 percent. This shows that investor return is more dependent on investor behavior than fund performance.

How to deal with the information overload is one of the biggest questions EKS Associates hears when meeting with new clients. Our answer to them: Tune out all the noise and do not make decisions based on your emotions after hearing a piece of news or based on one person's opinion. Market analysis and stock reports based on quarterly earnings are a perfect example. The media makes such a big deal about quarterly earnings announcements that the uninformed investor can't help but be swayed into an emotional decision based on this news. This is an inherent issue within the financial reporting system when the benefits of long-term investing are so widely known.

EKS Associates believes in a buy-and-hold strategy based on asset allocation. Studies have shown that more than 90 percent of an investor's return is based on asset allocation, or how much one allocates to equities (large cap, mid cap, small cap, international) versus fixed income investments (short-, intermediate- and long-term, municipal, high-yield, global). I have discussed the topic of asset allocation in prior Local Voices postings. We believe in the Efficient Market Theory, which, simply put, says that security prices already incorporate all information that is public. Therefore, anything you hear in the news or at a party, if it is public knowledge (and not insider information which is illegal to act upon), the price of the investment you are considering already includes that information. Keep in mind, the stock price of a company is more based on where they are expected to be in the future than where they have been in the past. As the average investor, when you hear of information about a company, you are probably one of the last people to know.

When it comes to investing and all the information that is readily available, we recommend that investors take the information available to them for what it truly is. An individual should spend more time determining their risk tolerance and asset allocation. They should select mutual funds in the asset classes they wish to invest in that have more than a three-year track record. They should monitor the portfolio during the year and rebalance to the original asset allocation at certain intervals. This forces one to sell high and buy low in order to rebalance to your original goal. Investments should not be judged for shortterm performance, but how it performs over the long-term (at least 10 years). Investing can be fun, but should not be seen as a gamble. And for goodness sake, do not listen to the guy at the dinner party with the great investment for you – his name may be Bernie.