Behavioural finance highlights challenges to rational behaviour. Managing attention sounds easy, but biases affect the inputs we use for analysis. The facts are often hidden amidst daily noise. Data might be gathered systematically for a good investment decision, but news headlines can then shake confidence - grabbing attention by seeming more recent and important.
The news we consume not only tends to drive more frequent trading and poor decisions, but subtly undermines portfolio risk appetite. Stock volatility itself gives little insight on risk, but it readily unnerves clients, if not investment managers. It can distract us from a supportive economic background or from sticking to our investment strategy. And, even what appear to be sophisticated risk models are overly dependent on prior volatility. We easily forget that markets could climb the wall of worry through 2020, as happened last year. Headlines often highlight the same old risks – understanding what is already priced-in to markets is the challenge.
It seems that central banks and politicians have determined that policy should be as accommodating to stockmarkets as possible. But there is still the same space in newspapers and other media to fill. Even if staying invested is the right strategy, nasty surprises seem to demand a response. It is tough to avoid a knee-jerk trade when headlines scream about the consequences of President Trump’s latest Tweet. At the same time, mainstream media tends to be consensus-driven and may be slow to pick-up on the new developments that really matter. Business as usual – economies and companies continuing to grow – rarely makes the headlines. The wrong choice of news sources can leave an investment manager focused on unoriginal opinion packaged with a lot of noise.
Investing temperament is hard to change, but being more purposeful about our exposure to news sources can help. Investors should try to bring balance to their news intake.