The biggest threat to your clients isn’t the market, it’s the constant stream of information thrown at them every day, from AI fears to global conflict and nonstop market headlines. This post is from the Chapter titled “The Illusion of Information” from my book INVESTMENT ILLUSIONS. It breaks down how that noise shapes behavior and gives you a better framework to keep clients grounded and aligned to their plan.

The Truth About Information

Information is essential to our survival and thriving in the world. As children, we are taught – sometimes painfully – not to touch a hot stove. We are told to go to school and continue to learn throughout our lives. Learning something new, whether by our own experience or through information, is exciting and pleasurable to our minds.

But not all information is beneficial. Some of it is downright toxic. Tom Clancy said, “Information, knowledge is power.”[i] Information helps us form opinions and perspectives, and therefore has a significant influence on our decisions and actions. That is why Tom Clancy also said, “If you can control information, you can control people.”[ii]

Our brain doesn’t want to have to question every piece of information we obtain – and most of the time we don’t need to. Taking information at face value is a mental shortcut that saves us from wasting precious energy. But when it comes to significant decisions, such as where to invest our hard-earned money, it behooves us to evaluate the source and validity of information presented to us. In this day, there is a lot of misinformation circulating around social media and even from reputable news agencies. Information shared today is often incomplete or selective in an effort to get viewers to draw certain conclusions. Unfortunately, much of the financial information presented to investors is toxic to our emotional and financial well-being.

Limits of Processing

As we discussed in Chapter 1, we can’t possibly process all the information available to us. While most information is processed automatically and subconsciously, we must discern which information we consciously pay attention to. But again, our brains have limits. Every time we pay attention to something, we aren’t able to pay attention to something else. People that multitask erroneously believe they can pay attention to two things simultaneously, but that is a fallacy. Multitasking is simply the activity of switching quickly between tasks. We may be able to walk and chew gum at the same time, but we aren’t able to hold two thoughts or consider two pieces of information at once.

The illusion of information is when information that is “noise” – which should be ignored – takes precedence in our minds over information that is helpful to making a good decision. Noise is information that is irrelevant, fleeting, uncontrollable, or unpredictable. It decreases our attention to things that are more important while making our mind busier than ever. If you think about it, much of today’s news consists of nothing more than noise. And almost all economic and investment news is noise. Do we use our limited attention and energy to focus on noise or on executing our investment plan?

The Noisecasters

The media is our primary source of information. The media consists of information found on social networks, radio stations, TV, websites…well, just about everywhere. Over the last few years, we have become familiar with the term “fake news” to identify news sources we find biased and/or misleading, but perhaps the better tack is to identify what information is worthy of our attention and what is just noise.

It is a common practice for investors to tune into the financial media. On the surface this seems to be a reasonable activity since we would prefer to be informed investors rather than ignorant ones. But when we consider the main purpose of the financial media, and how the information influences us, we may want to think twice. Let’s be honest – the financial media exists to make money. They need to sell ads, and in order to do that, they need your eyeballs. They provide market and economic information to get you to tune in, not to help you make wise financial decisions. Reporters and journalists don’t know you, your risk preferences, nor your investment objectives. All they care about is that you tune in today, and then again tomorrow. The news is sensationalized and imbued with a sense of urgency to make us emotionally invested in clicking, watching, or reading.

Newspapers and TV programs are generally the same length each day, yet editors and showrunners don’t know ahead of time what the news of the day will be. Some days, a truly newsworthy story could fill several pages or a few hours of TV programming. Other days there may not be much news, yet we’re never left with just a few paragraphs or ten minutes of TV programming. Instead, less substantial content gets elevated to “news.” Suddenly, most news – including news coming from the financial media – is nothing more than noise. If the financial media really cared about helping us make better decisions, there would be many days when newscasters inform us that they have nothing newsworthy to report and advise investors to stick to their investment plan. Then we could unironically enjoy the next hour of cat videos while avoiding the so-called “news.”

It’s not just the content of information that influences our decisions. We are also influenced by the timing and frequency of such information. Information that is top of mind and easily recalled, whether we just received it, or we have heard about it ad nauseum, is automatically classified in our mind as important. Information that is familiar to us may appear more likely to be true or to occur. You may have a financial plan and an investment strategy, but the more you listen to the financial media, the more you may find yourself questioning your own plan.

Most financial and economic information appears helpful, and perhaps essential to the informed investor. We aren’t inclined to question its validity or pertinence because we need information in order to analyze a situation. Here are a few examples of the financial information that many investors pay attention to that may be better to ignore.

Follow the Herd

When we decide on a restaurant to eat at or a product to buy, crowdsourcing an answer can be invaluable. We ask friends for their thoughts or look at reviews to make sure we make the right choice. But when we are investing, following what other people do (or suggest) may cause us to make poor decisions.

Ultimately, the investment choices of other investors do not reflect our personal goals, values, and constraints. When our choices are influenced by stock market performance, we are no longer making decisions based on our plan; rather what other people are doing. Our brain loves this approach because we don’t have to use critical thinking to make decisions. We may find peace by conforming with others (misery loves company), but deciding to follow the herd usually has more to do with the comfort of going with the crowd than it does with making a wise investment decision.

Herding, or momentum investing, can be exciting and even profitable over the short term. Several meme stocks and other assets experienced parabolic increases in price in 2021. Some individuals got rich. Others got rich and then lost it all. Investing in something just because someone, or some group, made a lot of money is not a reliable investment strategy. It can feel right, and the urge to experience similar riches will be strong, but it is nothing more than speculation – betting its past success will continue without concern for the risk or wisdom of such “investment.”

Real Time Market Info

Investors often log in to their brokerage account or check finance apps to get stock market quotations and see their portfolio values. This activity, however, can be toxic and destructive not only to making financial decisions, but also to our relationships. No matter what, short-term market movements have the ability to influence our mood, which in turn influences how we treat others. If we see that the markets are up, we get a shot of dopamine, which makes us feel good, confident, and even giddy. If markets are down, especially if they are down significantly, perhaps over a prolonged period of time, we may get a shot of cortisol – our stress hormone. It may also activate our amygdala. That will make us anxious, worried, and may very well put us in a bad mood.

Watching the market and following daily news stories (noise) is a recipe for making costly investment mistakes. When we see movement and feel a sense of urgency or excitement, we are hardwired to want to act. It is against our very biology to do nothing in those circumstances. Hits of dopamine may encourage us to buy stocks while the amygdala may influence us to sell stocks. In either case, we aren’t thinking rationally about what will help us reach our goals. We are riding a wave of emotion.

The father of behavioral economics, Daniel Kahneman, said, “If owning stocks is a long-term project for you, following their changes constantly is…the worst possible thing you can do.”[iii] Stock prices in the short term are largely influenced by others’ moods and expectations of the future – both of which are highly variable and inconsistent. And don’t think pricing doesn’t influence our decisions. Even Warren Buffett is influenced by price. He said, “I like to look at investments without knowing the price – because if you see the price, it automatically has some influence on you.”[iv] Price, and changes in price, may signal to our brain whether we should buy or sell a security – without researching it or considering how it fits within our investment plan. Warren Buffett is a great investor not because he has a higher IQ than us, but because he understands what information is beneficial and what is toxic.

Past Performance

As investors identify which securities may be best for their portfolio, whether that be a stock, mutual fund, or some other security, looking at its prior performance can be as automatic as blinking. The natural line of thinking, thanks to the hardwiring of our brain, is that future performance will look something like past performance.

Whenever you research a security, read a prospectus, or see an advertisement, you will find a disclosure such as, “past performance is not indicative of future results.” While this disclosure is required by the SEC and protects the publisher of the information, the brain couldn’t care less. The brain sees past performance and automatically extrapolates that to future return. It just can’t help itself. And this kind of thinking results in investors chasing performance. Year after year, the top performing mutual funds attract significantly more money than their peers. This is exacerbated by top performing mutual funds frequently advertising their stellar results. Couple the constant reminders of how well another investment is doing and the brain telling us this great performance will continue, and it’s natural to want to buy yesterday’s winners. But doing so relies on the false assumption that the performance will continue.

Past performance is not a reliable indicator of future performance, but it can be helpful in determining the range of returns a security may experience over various market conditions. For example, if a security lost more than the overall stock market in the last downturn and made more money recently in the bull market, then it is likely this security may do very well so long as the bull market continues. But when the market changes direction, the security may experience greater loss than the overall market.

Looking at a single past performance number, such as the five-year average return, masks the fluctuation in a given security. Whether we are looking at one-year, five-year or ten-year numbers, all we see is a smoothed-out annualized return. We aren’t seeing the many fluctuations that occurred during that time period. The reality is that many investors have a hard time dealing with losses in portfolio value, so we better know what kind of fluctuations we could experience before it is too late.

Many investors wish they had owned Amazon from the beginning. It has had a phenomenal return. But what we don’t consider is how gut wrenching it was to hold such a profitable security. During the technology bubble burst, Amazon lost 95% of its value. It went on to lose more than 50% two separate times from 2000 – 2010 and has lost over 25% five times since 2009.[v]

It’s not just individual securities, but the stock market as a whole routinely experiences significant fluctuations on a year-to-year basis. JP Morgan found that from 1980 – 2020, the S&P 500 experienced an average intra-year loss of 14.3% from its highs.[vi] And in five of those years the market did even worse – going down more than 25% from the highs. Interestingly, of those five large intra-year drawdowns, the stock market ended the year positive in two of the years.

The bottom line? It is more valuable to know the historical fluctuations of a security over various market cycles than its historical performance over a specific period of time.

Information We Should Know

The illusion of information teaches us that not all information is beneficial – but some of it certainly is. Still, given our limited ability to process information, we need to discern which information is worthy of our attention and effort. The following information is worthy of your attention.

Market & Investment Truths

  • The market is cyclical. The market fluctuates a lot, and sometimes quite severely. The more we watch the market, the more often we will experience its volatility.
  • Corrections, recessions, and bear markets are a normal function of healthy capital markets. They aren’t fun to live through, but they are essential to the long-term health of our markets.
  • Markets are unpredictable. More on this in the next chapter.

Your Investment Plan

  • Know what securities are in your portfolio and why they are in it. This will help you have conviction when times get tough.
  • Understand how your securities are expected to perform in various stages of the economic cycle. Nothing outperforms all the time.
  • Know why you are investing. What goals are you trying to accomplish? Is it to feed your ego or provide for your family during retirement?
  • Define how much fluctuation you can psychologically withstand. It’s not about maximizing return; it’s about creating a portfolio you can hold through thick and thin.

Know Yourself

  • Understand your own investment psychology, especially how mental shortcuts and emotions may negatively influence your decisions.
  • Understand how you are influenced by market movements, the noise of news, and the opinions of others.
  • Create a customized game plan – a defense system – to improve the reliability and precision of your decision-making process.

My hope is that you open your eyes to much of the toxic information available to investors. I refer to these as illusions because on the surface each one seems helpful. But as you go through the book, you will learn for yourself exactly what information is toxic and what information you want to focus on. This will help you develop a robust investment strategy and help you take a more thoughtful and deliberate approach to your investment decisions.

Related: Behavioral Finance Fails Without Better Advisor Communication

[i] www.brainyquote.com/quotes/tom_clancy_290236.

[ii] Ibid.

[iii] Zweig, Jason. Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich. Simon & Schuster, 2007.

[iv] Ibid.

[v] Carlson, Ben. (March 28, 2021). Owning the Best Stocks is Hard. A Wealth of Common Sense. https://awealthofcommonsense.com/2021/03/owning-the-best-stocks-is-hard/

[vi] JPMorgan Guide to the Markets. June 30, 2021.