Broker Check

TMI and when less is more…

| February 01, 2017
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Drinking out of a fire hose

Yes, it can be overwhelming with the 24/7 financial media and our friends/community sending us links to “news – usually negative as that is what resonates more” via social networks. After the Great Recession, think about all the negative information/predictions gushing out at us non-stop about another imminent global financial meltdown due to: the financially unstable US banking system, the Greek Debt Crisis, the US Debt Ceiling stalemates, China’s imploding economy/stock market, the collapse of oil prices, and the US Federal Reserve Bank worsening the already grave global situation by rapidly raising interest rates.

Exactly one year ago I wrote “Goldilocks and the three scares” to allay the three big fears that caused global markets to drop 10% in the first two weeks of 2016. One year later, none of the three fears have caused the equity markets to collapse. On the contrary, US equity markets have been making new highs.

Humans are emotional

Behavioral finance studies have shown that “too much information” (TMI) can lead to impulsive decisions: market timing/excessive trading rather than investing. Richard Thaler, a behavioral economist, did a study that spanned over 25 years in which participants were offered only two choices to invest in: 1) a less volatile bond fund but lower performing over time and 2) a more volatile stock fund but higher performing over time. The participants were also given a choice as to how frequently they received information about performance and an opportunity to change their selection.

Those participants that received performance information over a period of five years (investors) did twice as better than those that received monthly performance information (traders). Thaler traced the lagging performance of the “trading group” to their tendency to sell their stock fund when there were short term drops and missed the recovery as they were now incorrectly positioned with the less volatile bond fund. In other words, they found it hard to follow Warren Buffett’s advice to, “be fearful when others are greedy, be greedy when others are fearful”.

The “investing group” may not have followed Buffet’s advice any better; they just had the advantage of seeing performance every five years rather than monthly. They hung in and “rode out” the short term dips because their five-year performance updates spared them the emotional pain of experiencing the temporary declines in market value, eliminating fear induced selling. By getting longer term performance data, which is less volatile, they were able to get the rewards of the higher returning stock fund.

How often do we price our homes?

I would say that home prices are more volatile than equity prices because homes are illiquid; you can’t readily sell your house or part of your house for cash on a daily basis. Homeowners do not see daily or monthly prices; they usually price their homes when they buy and when they sell (usually over decades). In between buying and selling, they may get a price (appraisal) when they refinance or get a home equity loan. During short term declines in the equity markets, general housing prices should drop more because of the illiquidity factor, but home owners don’t worry about it because they don’t see a decline in price as it is not provided by CNBC, nor do they get a monthly statement.

Less is more

The Thaler study, our experience in the equity markets since the Great Recession and our experience in owning homes show that too much information makes it harder to get good investing results and so “less is more”.

Yes, I will admit that this is hard to do when you can access to so much information with a touch of your smartphone, loaded with financial news apps or apps that will show all your investments (stocks and homes) priced in real time. No, you don’t have to “live off the grid” in a tiny house in Vermont without an internet connection to move towards “less is more” mode. “Less is more” means that you need to filter out all the “noise” and not let short term price declines or predictions of a “once in a lifetime correction” prevent you from investing.

If you know of a friend or a family member that has abandoned investing due to market volatility or the never ending predictions for financial Armageddon by financial pundits, please have them call us. We can help.

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