The Case for Balance
Ever wonder why there’s so much bad news out there? Maybe it’s because people find bad news more interesting than good news.
A new study involving more than 1,000 people around the world concludes that, on average, people pay more attention to negative news than positive news. Our bias towards negative news might be a large part of what drives negative news coverage. It may also be why, left to their own impulses, most people will make changes to their portfolio in response to negative news rather than positive news.
The scientists pointed out there are some evolutionary reasons as to why negativity bias exists. For one thing, it can be much riskier to ignore negative information (a storm is coming) than good news (a dog rescued a boy from a tree). Paying attention to negative news, the researchers said, is generally an effective survival strategy.
The chart below lists some of the negative news stories since March 2009, when markets bottomed out during the GFC.
Source: Michael Batnick, 8 January 2020
We’ve shown many clients similar charts over the years. Markets keep trending up despite the bad news – the 495% figure represents the growth in the stockmarket for US investors from 2009 to late 2019.
What we haven’t shown you is a chart which plots all the positive developments over the years. It’s a harder chart to create, because sourcing a list of good things isn’t easy, even with the power of Google. As Bill Gates said, “Headlines, in a way, are what mislead you, because bad news is a headline, and gradual improvement is not.”
All of the items below were headlines, but none of them were necessarily reasons to buy stocks.
Source: Michael Batnick, 8 January 2020
Here are some of the great things that didn’t necessarily make headlines but are reflected in the 495% rise in the U.S stock market since 2009:
Advances in medicine
Transparency increasing for financial consumers
The experience of travel, specifically airplanes
Costs going down for financial products
Technology costs coming down, like televisions, for example
Google maps is free and incredible
High-speed wi-fi, everywhere
Fuel economy of a motor vehicle. Average fuel consumption improves every year
Solar energy is a viable option
The fact that bad news travels ten times faster than good news is a major reason investors typically earn less than market returns. Achieving the market return is as simple as investing in a well-diversified fund and keeping it on course. It is that simple, but it isn’t that easy, because bad news presses your face against an amplifier, while good news just plays quietly in the background.
Just because things are simple doesn’t mean they are easy to achieve. If simple meant easy, we’d all be financially independent and at a perfect, healthy weight. At the same time, don’t confuse complexity with quality. The traditional financial industry is built, in large part, on the notion that complexity equals quality.
Sticking with good money decisions isn’t easy, as the charts above show.
That’s our negativity bias at work. We humans have a propensity to give more weight in our minds to things that go wrong than to things that go right—so much so that just one negative event can hijack our minds in ways that can be detrimental to our work, relationships, health, and happiness.
One of the most important roles we play in our client’s lives is preventing them from reacting to negative news when it’s clearly not in their interest to do so. This helps our clients to live their best possible lives.
Author: Rick Walker
Reference Sources:
1. Why does so much news seem negative? By Amina Khan, Los Angeles Times, 5 Sept 2019
2. Gradual Improvements Redux by Michael Batnick, 8 January 2020