When it comes to how the average person interacts with investment information, I’m often put in mind of the famous lines, “Water, water everywhere, but not a drop to drink”. Investors are drowning in content, yet all too often are still left thirsting after indicators of what they should actually do.
Plenty of data back up my metaphor. As we recently highlighted, four in ten investors don’t think they are equipped with the data and content they need to help them make investment decisions[i], despite all the commentaries, newsletters, social media posts and more they encounter. Tracking technologies ensures anyone who has identified themselves as affluent is bombarded with this stuff. The fact that 47% of people “bounce” out of financial services websites after looking at just one page and the average view time is just three minutes[ii] show how rarely people find exactly what they are looking for.
The situation is generally just as bad when it comes to seeing how investments have performed and why. Almost half of investors say the investment communications they receive from their managers are not personally relevant and less than a third believe they contain actionable insights[iii]. Although investment firms no doubt have the very best intentions, their output tends to confuse rather than clarify.
The reasons are twofold. Firms have to say something (if only to keep their search rankings up) and they have to speak to a broad audience, rather than to you the individual – and to your specific portfolio holdings and situation. The reader (or viewer or listener in these multimedia times) is left to interpret the information for themselves.
The customisation conundrum
The answer investment managers are working on is to intensely customise the information they send out based on the actual investor they are speaking to. In time, Artificial Intelligence-driven solutions that are currently quite rare will become commonplace. In the interim, the sector has to rely on what are in reality pretty blunt tools and an overload of information in the hope that some of it will hit the mark.
The consequences for investors can be dire. Those in a managed relationship should fare better, given that they have an advisor to interpret and filter information for them. Those who are self-directed, meanwhile, frequently fall into one of two traps. Either they are swayed by every nugget that comes their way, chopping and changing their portfolios often to little avail and very often to great cost, or they are paralysed with fear of doing the wrong thing. Even worse, information overload often means that people don’t start investing at all and simply leave their wealth languishing as cash. With interest rates at rock-bottom levels, inflation means that – in real terms – they end up losing significant amounts of money over time.
So what is an investor to do, given that we can’t dedicate our lives to all this? (If we could, we’d be professional money managers ourselves!) The answer lies in separating the real signals from all the investment “noise”.
The concept of investment noise was formally introduced by economist Fischer Black in the 80s, who posited that we need to distinguish this from real information to make real returns. Noise traders jump on every piece of news and even gossip in their investment decisions. And, because they are especially reactionary, they don’t tend to give themselves time to tackle their cognitive biases. There are plenty of these at play, but one of the biggest is confirmation bias, where we give extra weighting to information that confirms what we already “know”. You can see how the seeds of disaster are sown in such a situation.
Stick to a system
The more sensible alternative is for investors to acknowledge that they are human and as much as they might wish, biases and emotions cannot be taken out of the picture. Indeed, I would say that emotions are essential to being a good investor, for what else would inspire us to dedicate extra funds to long-term goals if not the desire to provide security for our family or to foster our personal dreams? With an acceptance of human fallibility, we can then set about implementing systems to counteract it.
In the simplest terms, to be effective investors we need a system and a commitment to separate out true signals from noise. This means we need to be discerning about the information we take on board and focus on long-term underlying trends, rather than short-term fluctuations. For instance, a profit warning on an otherwise robust company could simply be noise and the savvy investor could take a temporary sell-off as the chance to strengthen their position. Perspective is all.
None of this is to say that alternative data aren’t worth looking at. It can certainly enrich our understanding of the markets and give investors an edge if used wisely, as we recently explained. You just need to limit how much you are influenced by factors that may not be relevant and keep your eyes on the long-term prize – not what all the myriad pundits on the investment world are saying every second of the day.
Find trusted sources of information, apply a critical eye and stick to a fundamentals-driven system of investing that serves your long-term goals. Making snap, emotionally driven decisions based on what is “most read” is a sure-fire way to destroy value. Watch the bips, not the clicks.
This piece is for informational purposes only, and is not intended in any way as financial planning or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.
[i] “Redefining Investor Data Needs”, Refinitiv 2021
[ii] Digital Experience Benchmarks 2021, Contentsquare
[iii] Broadridge Financial Solutions