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5 tips to turn down the noise and stay focused as an investor
A surge in financial information, opinions and a natural inclination to focus on the negatives is leading to poorer short-term outcomes for investors, which is impacting long-term results, an economist warns.
5 tips to turn down the noise and stay focused as an investor
A surge in financial information, opinions and a natural inclination to focus on the negatives is leading to poorer short-term outcomes for investors, which is impacting long-term results, an economist warns.
Investors who want to improve their long-term financials should shut out the noise associated with the current financial markets and instead focus on the benefits of long-term investing, AMP Capital’s Dr Shane Oliver has said.
He believes psychology plays a major role in investing, often to the detriment of stronger financial returns.
“Firstly, our brains are wired in a way that makes us natural receptors of bad news,” Dr Oliver said.
“People suffer from a behavioural trait that has become known as ‘loss aversion’ in that a loss in financial wealth is felt much more distastefully than the beneficial impact of the same-sized gain.”
According to Dr Oliver, investors need to shut out the bad news.
The economist highlighted that the popularity of “doom and gloom” predictions means investors are constantly flooded with bad news over balanced commentary.
“In competing for your attention, bad news and gloom naturally trumps good news and balanced commentary,” he said.
“So, naturally, it seems that the bad news is ‘badder’ and the worries are more worrying than ever.”
While highlighting the potential pros of fact-checking and analysis, he also pointed to the potential creation of an information overload.
He continued: “For the most part, we have no way of weighing such information and no time to do so. So, it becomes noise.
“This comes with a cost for investors. If we don’t have a process to filter it and focus on what matters, we can suffer from information overload.”
This, he explained, can be bad for investors: “When faced with more (and often bad) news, we can freeze up and make the wrong decisions with our investment.
“In particular, our natural loss aversion can combine with what is called the ‘recency bias’ that sees people give more weight to recent events in assessing the future — to see investors project recent bad news into the future and so sell after a fall.”
Five ways to manage the noise
To be successful at investing, Dr Oliver believes investors need to make the most of compound interest and that means they must be in the game for a long time.
“The only way to do this is to turn down the noise on the worry list and the explosion in investment information and opinion,” Dr Oliver explained.
“This is getting harder given the distractions on social media. At an obvious level, it makes sense to turn off all notifications on your phone or iPad, but more fundamentally, here are five suggestions as to how to turn down the noise and stay focused as an investor.”
According to Dr Oliver, this is how you can tone down the noise:
1. Put the latest worry list in context.
2. Recognise that shares return more than cash in the long term because they can lose money in the short term.
3. Find a process to help filter noise.
4. Make a conscious effort not to check your investments so much.
5. Look for opportunities that investor worries throw up.
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