How to ignore the media hype on the stock market
by Tim Goodwin
Most people would argue that living in a digital world, with instant access to an endless stream of information has made us smarter and more self-empowered than past generations. Investors believe that it has “leveled the playing field”, enabling them to make investment decisions based on the same information once only available to the investment pros. The incessant quest for information has reached such a fever pitch that the media outlets, including the cable channels, print media, and now the blogosphere, are churning out content 24/7, and it still isn’t enough to satiate peoples’ ravenous appetite for information. So, it’s all good? WRONG.
There is a much stronger argument that can be made that, for people in general and investors especially, information overload not only makes it more difficult to make rational decisions, it often leads to behavior that can be harmful, if not devastating to your financial health. While there has obviously been a marked increase in the quantity of information, the quality of the information will always be in question. Where you have quantity without quality, all you really have is “noise.” And for people who really should be listening for legitimate financial advice and relevant information, it can be deafening.
With most of the population wired to the Internet and mobile devices, information has become so ubiquitous that it has become an entitlement for people who take its availability for granted. The media is taking full advantage of that entitlement attitude to layer on as much content as it thinks the public can consume. In order to attract the attention of a pre-occupied public, and therefore the advertising dollars its viewership generates, the information has to be entertaining, pithy, and compelling. To that end, the media has no fear or shame in hyping a story beyond a reasoned reality, in order to make its information more essential.
In the investment arena, stories can’t be compelling, or entertaining, for that matter, unless they are consequential in the short term. In other words, the Facebook IPO, even though it was of little actual consequence to most investors, is a much more compelling story than an essay on the superior, long-term performance of index investing, even though it could benefit the vast majority of investors. The problem is that the information we, as investors, receive is filtered through an “excitability” gauge. Can you imagine an analyst or stock guru spending 20 minutes on CNBC talking about the 5-year growth prospects of the stock market and how a diversified portfolio is your best opportunity to outperform the market? Three-quarters of the audience would switch over to the food channel where they could find much more “consequential” information.
Unfortunately, access to more information and technology has not improved investor performance over the last couple of decades. While we’re not suggesting that you should turn off your cable news or refrain from surfing investment sites, you do need to remind yourself that these sources of information don’t necessarily share your agenda. Gathering information and educating yourself are essential parts of the process, but it should be done in the context of your clearly-defined objectives and a well-conceived financial plan.