The Downside of Being Overinformed
We’re drowning in information. According to Scientific American, the amount of data that we produce doubles each year. In his book, The Behavioral Investor, Daniel Crosby made that idea tangible by adding that “in 2016, humankind produced as much data as in the entire history of the species through 2015”, begging the question: What are the unintended consequences of having all of this information available?
It’s difficult for today’s investor to say they don’t receive enough account information. Instead, the opposite is true. Between their monthly statements, their quarterly statements, discussions with their advisors, trade confirmations, and now, with online account access, investors can obsess their account performance at a minute’s notice.
The financial services industry believes in transparency, and that’s wonderful. Most of our industry members would say that firms are providing your clients with more information than ever. While that statement is true, it’s important to understand that without any direction, it’s common for investors to look at account performance, react emotionally during declining markets and make decisions that are not in their best interest.
When we were taught that stocks “are long-term” investments, it meant long term. An investor who watches stock prices on a daily basis may be surprised by how much stocks fluctuate in value. Sometimes those fluctuations can feel frightening. Yet, in his book, Stocks for the Long Run, Jeremy Siegel found that investors “have never lost money in stocks over any 20-year period.” That means investors who look at one quarter’s statement and sell their stocks because they’re down in price are doing themselves a disservice because they will never reap the rewards that equity investments offer the individuals who hold them for many years instead of many months.
Greg B. Davies and Arnaud de Servigny take that concept a bit further. In their book, Behavioral Investment Management, An Efficient Alternative to Modern Portfolio Theory, Davies and de Servigny tell us “the shorter the time horizon becomes, the riskier the investment looks.” “For example, if an investor looked at the performance over monthly time horizons, then the investor would observe a positive return in only 60.8 percent of the months and a negative return in the other 39.2 percent. Thus, simply by observing investment performance more frequently, the same investment appears much riskier.”
This is not to suggest that investors shouldn’t receive regular account information. Instead, the point is to remind you that as a financial advisor you are responsible for putting short-term investment account fluctuations into perspective. From the outset, set expectations. Tell your clients that stocks will fluctuate in value on a daily basis. Help understand that it is in their best interest to focus on what’s most important: They are moving forward to achieve their financial goals, they have a financial plan in place and that they are working with a financial expert, you!
This material is for investment professional use only.