Can investors have too much information?

We have a complicated relationship with information. We all complain about information overload, but then we want complete transparency. The best example of this conflict that comes to my mind is the software license agreement that you accept when updating the operating software on your mobile device. Presumably, this document is very transparent, with the agreement running into hundreds of pages. I say ‘presumably’ because I, for one, have never read it. As a result, the ‘realised’ transparency is very low. Of course, if you start to read the agreement, it is hardly a welcoming read.

So why is a CIO talking about mobile phone documentation? Well, I believe there may be an interesting parallel when it comes to information and managing your investments. The digital world has made it easier for financial service providers to share loads of information, including close-to-real-time valuations not just of the overall portfolio, but also of individual holdings. To question whether this is a good thing is almost heretical, especially when major financial scandals always involve a lack of transparency.

However, today, I am more interested about the impact this transparency has on investment decision-making. If you are an active trader, there is no doubt having access to up-to-date information, live pricing and market liquidity is very important. But if you are a long-term investor, having access to too much information may be a bad thing. In theory, information should only really be required if you might want to act on that information. An active trader, by definition, is always trying to figure out when to buy or sell. A long-term investor, on the other hand, is likely to make changes much less frequently.

To me, there are two dimensions to the topic of information: frequency of updates and depth of reporting.

For long-term investments, one can argue that looking at valuations on a daily basis is a waste of time. If the valuation is higher than yesterday it gives you a slight spring in your step and when it is lower you can console yourself that it is a long-term portfolio and minor daily/weekly fluctuations do not really matter. However, my experience is that far too many people get overly excited about gains and overly worried about short-term losses even if they are invested in a diversified portfolio with long time horizons. Ironically, this behaviour increases the size of market swings in both bull and bear markets, potentially leading more investors to over-react. 

The depth of performance reporting is equally important. Let’s say you have a diversified portfolio and look at three different scenarios. In the first, the only information you have is the portfolio’s aggregate value. In the second scenario, you are given the performance of each fund that you hold. Finally, you are given complete transparency about all the underlying assets you hold, down to the individual securities in your portfolio.

As the portfolios are identical in terms of underlying holdings, the performance will be the same. However, the same investor may react very differently in the different scenarios. As is normal in any portfolio, some assets will have gone up in value and some will have gone down. In the first scenario, this will not be visible, you only see the net outcome i.e., the performance of the overall portfolio. Given the benefits of diversification, the volatility of the portfolio will be lower than that of the underlying components. Therefore, the investor who is provided only the performance of the overall portfolio is more likely to remain invested, which we still believe is the number-one driver of investment success over the longer term for the average investor.

In the other two scenarios, you are given more information and implicitly face more potential options. In the second scenario, the investor could choose to sell underperforming asset classes and in the third individual securities. This would have implications for the overall balance of the portfolio, potential increasing its volatility (and the risk of over-reactions further down the line) and reducing the portfolio’s long-term expected returns.

Of course, this is not to say increased transparency is inherently bad, but we should be aware that we all have behavioural biases that encourage us to react to information in a biased manner. As a rule of thumb, the more diversified your portfolio is and the longer your time horizon, the less changes you should make.

(Steve Brice is Chief Investment Officer at Standard Chartered Bank’s Wealth Management unit)