Investors have more to worry about than ever, it seems.
Our digital devices and social media platforms are flooding us with a ceaseless tide of news and opinion pieces about the next GFC, volatile stock markets, and what US President Donald Trump will do (or tweet) next.
And it’s hurting our investment decisions, according to Shane Oliver, AMP Capital’s chief economist.
He says that increased disagreement about facts, which are blurred with opinion is part of a broader problem called ‘truth decay’. Personal experience and opinion is having a greater influence than fact; and therefore trust in traditional sources of fact, such as newspapers or the government, is declining.
What does truth decay mean for me?
Truth decay leads to a deterioration in civil debate, “political paralysis”, fracturing and disengagement between our social institutions, and uncertainty.
“It could lead to less favourable economic policy decisions which could weigh on investment returns; and investors are subject to the same forces driving truth decay such that it explains why the worry list for investors seems more worrying and distracting,” Oliver said.
That is, investors are vulnerable to the way they process information. On top of that, we process financial loss more “distastefully” than we process financial gain of the same size, which means we tend to have an overfocus on threats and bad news than good stories.
We’re also receiving more information than we can assess or analyse – and it just becomes noise and information overload.
“This can be bad for investors as when faced with too much information we can become more uncertain, freeze up and make the wrong investment decisions,” the chief economist said.
“In the pre-social media/pre-internet days it was much harder for ordinary investors to be exposed to such disaster stories on a regular basis.
“The obvious concern is that the combination of a massive ramp up in information and opinion combined with our natural inclination to zoom in on negative news is making us worse investors: more distracted, fearful, reactive and short-term focussed and less reflective and long-term focussed.”
What can I do about it?
In order to be successful as an investor, you musn’t get “blown around by each new worry,” Oliver advises.
1. Put things into perspective.
“There is always an endless stream of worries.
“Yet despite all the worries, investment returns have been good with, for example, average balanced superannuation funds returning 8.5 per cent per annum over the last five years.
“The global economy has had plenty of worries over the last century, but Australian shares still returned 11.8 per cent per annum since 1900 and US shares 9.8 per cent per annum.
“So is the latest worry is any more threatening than the last one?”
2. Understand how markets work.
Even though share markets are volatile in the short (which is due to the knee-jerk reactions of anxious investors anyway), it has solid returns over 20-year periods.
“Short-term volatility is the price wise investors pay for higher long-term returns,” Oliver said.
3. Find a way to filter your news.
Be selective. Build your own investment process, pick some investment subscriptions and stick to those.
4. Check your investments less.
“On a day to day basis the Australian All Ords price index and the US S&P 500 price index are down almost as much as they are up.
“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 about 35% of the time.”
Stretch it to a decade and you’ll see positive returns in Australian shares 100 per cent of the time.
5. Find opportunities in the bad news.
“Periods of share market turbulence after bad news provide opportunities for smart investors as such periods push shares into cheap territory,” Oliver advised.