Want Your Investments To Do Better? What’s A Smart Investor To Do?

Written by Matt Bell

If you pay close attention to investment news, it’ll either make you laugh or it’ll drive you bonkers. Within the same hour, and on the same market news website, you will often see completely contradictory articles. One says the market is headed higher; the next says the market is about to tank. What’s a smart investor to do?

Q: What’s a smart investor to do? A: Be very careful about your information diet.

Less Information = Greater Success

In the late 1980s, former Harvard psychologist Paul Andreassen conducted an experiment to see how the quantity of market information impacted investor behavior.

He divided a group of mock investors into two segments — investors in companies with stable stock prices, and investors in companies with volatile stock prices. Then he further divided those investors. Half of each group received constant news updates about the companies they invested in, and half received no news.

Those who received no news generated better portfolio returns than those who received frequent updates. The implication? The more closely you monitor news about your investments, the more likely you are to make changes to your portfolio — usually to your detriment.

In another study, renowned human behavior researchers Daniel Kahneman, Amos Tversky, Richard Thaler, and Alan Schwartz compared the stock/bond allocations of investors who checked on their investments at least once a month against those who did so just once a year. Those who took in the least information about their portfolios made fewer investment trades and generated higher returns.

Loss Aversion = Investment Losses

One factor at work here is “loss aversion.” First quantified by Kahneman and Tversky, it’s the idea that people feel the pain of loss more acutely than the pleasure of gain. The frequent monitoring of investment portfolios brings every downward market move to the attention of investors, who tend to react by moving money into less risky assets (bonds instead of stocks), thereby locking in their losses.