The Bad News About News

We are flooded with sources of information – much of it even unsolicited – these days.

It used to be that investors had to proactively seek out information. They tuned into a radio station to hear the midday stock market update or turned on the television to watch the evening business report. Now, social media serves up hot stock tips even when we’re not seeking them. YouTube can send us down rabbit holes of information – much of questionable worth – about the economy, companies, and trading.

We’ve never had so much information so conveniently at our fingertips. And yet, we’re no better off for it. In fact, I could make an argument that we’re actually worse off.

Long before the internet came about, there were already research studies proving that financial news can be detrimental to investors.

In the late 1980s, a psychologist conducted a fascinating study with students at Massachusetts Institute of Technology (MIT). The psychologist’s name was Paul Andreassen and his conclusion from his research offered a powerful insight for investors.

Andreassen divided students at MIT into two groups.

The first group was given only stock prices for a particular investment. The second group received not only the stock prices but a series of news reports about the investment, too. Both groups were allowed to trade as they saw fit.

Andreassen’s research uncovered a startling finding.

The group that received no news or information about the investment made more profitable trading decisions than their “better informed” peer group. All that news and information deluging the second group caused them to trade more frequently, which proved to be counterproductive and destructive to their long-term portfolio value.

Keep in mind, MIT is home to some of the smartest young minds in our country. But in this case, even their intellect wasn’t immune to the detrimental effects of overconsuming financial news.

The problem has nothing to do with intelligence. Rather, it’s that investors’ physiology is hardwired to conspire against them.

Our brains have two parts: a reactive side and a reflective side. Our reactive side is fed information three times as quickly as our reflective side. So our first instinct is to act, not to think.

This feature serves humans extremely well in certain circumstances. For example, instead of waiting for our reflective brain to figure out if a snake two feet in front of us has the right markings to be poisonous, our reactive brain would have already compelled our feet to spring into motion.

But it’s our reflective brain that performs the best long-term decision-making and creates the most prudent plans.

In financial markets, our reactive brain is constantly firing on all cylinders, coaxing us to make rash decisions in the heat of the moment. The best investors, however, figure out ways to quiet their minds until the reflective part can catch up to perform its more tedious, but helpful, machinations.

That being said, news isn’t all bad. It can be incredibly useful. As investors, we need to find the balance between getting informed by the news and becoming influenced by it.

Most of us, quite frankly, would benefit from monitoring our intake of financial news. That is doubly true when the stock market starts falling. Because, remember, delivering the news is a business. And the best way to boost business is to trumpet scary headlines and narratives.

Successful investors tune out that noise.

Rather than relying on the news to inform your investment strategy, here’s a better approach: Stay positive. Stay diversified. And stay in the market.