Information bias

Information bias is the tendency to seek and evaluate information, even if it may not be irrelevant from the perspective of the investor’s needs. The traditional view on information related to investments and finance was that investors did not have sufficient information. Regulators tried to address this issue by asking AMCs to disclose all the relevant fund related information in the monthly fund factsheets. In addition to the AMCs, there are a number of third party research firms / analysts who provide information related to fund and stock performance to investors. The advent of internet and spread of broadband heralded the information age. Today, investors had much more information than before and this fuelled their thirst for more information.

Through social media we are now being bombarded with new information almost every hour and sometimes every few minutes. Too much information can cause bias if you take all information which you receive very seriously without checking their veracity or even if it is relevant at all. If you have information bias in investing, you may get confused or even worse; make wrong investment decisions based on irrelevant information which harm your financial investments.

Information bias in investing

You should ask yourself, if some of the information you are getting is relevant at all. Information like daily NAV movement, 52 weeks high or low NAVs, best performing funds of the month etc. are useless in our view. Should you buy or sell a fund based on its last 7 days or 30 days performance? However, with interesting captions they are made to look as if it is very important information that you should pay attention. But mostly they are irrelevant or cause you to make wrong investment decisions.

Likewise, for mutual fund investors, top stocks bought or sold by fund managers every month is mostly not relevant. When you are investing in mutual funds, you rely on professional fund managers to do the stock selection because you do not have their expertise or experience. Top stocks bought or sold by fund managers can be an interesting article on the internet but is it really useful for you as a mutual fund investor in making investment decisions?

Another danger of information bias is investing in wrong product. There is a lot of content online almost on any topic. Let us suppose you want to buy life insurance. You will find a lot of information on insurance products which will also say “grow your investments”. Though your objective was life insurance, because of the information overload, you can be distracted from your primary objective of getting adequate life insurance and lead you to a product which addresses neither your insurance nor investment needs optimally.

How to avoid information bias

  • Financial planning: Financial planning with clearly defined financial goals and investment plans to achieve different goals can help you avoid information bias. Make sure that you are committed to your financial plan.
  • Know the fundamentals of investing: Know what is important and what is not. You need to understand what will make your financial goals successful and filter out the unimportant information.
  • Do not track your portfolio on a daily basis: It is important to monitor your portfolio regularly, but you not need to track it on a daily basis. Short term price movements have no impact on long term portfolio returns. If you track your portfolio on a daily basis, then you are likely to be prone to information biases.
  • Seek counsel before you react to information: Information that you get every day or every hour usually has no bearing on longer term portfolio performance. If you want, you can seek more information about investments, but seek the guidance of a financial advisor before you act on the information you have. A lot of information you get daily may be totally irrelevant and can harm your financial interests, if you act on it without considering other factors.

An Investor Education and Awareness Initiative by Mirae Asset Mutual Fund.
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