Hitting the headlines
When we think about quickly reacting to market news, two topics spring to mind. The first is the issue of whether we are investing actively or passively. And the second is the thinking trap of “availability bias” – or the influence very recent or very vivid information can wield.
Act swiftly or track a benchmark?
As the name suggests, active investing can involve buying and selling specific company shares – perhaps quickly as news emerges. Fans of active investing say fund managers who analyse companies they invest in can make money by picking winners and selling before they fall. Supporters of passive funds often question the ability of any particular active manager to consistently outperform their benchmark and highlight fees as a factor.
An eZonomics article on active (and passive) investing tells how there is a longstanding debate over the merits of active and passive investing and details several studies on the topic. Investors have to decide which strategy to take – or to try to get the best of both worlds by putting money in a combination of passive and active funds.
How much do we know?
Availability bias says that recent or very vivid information can influence the way we invest – and highlights a danger of overreacting to such information because it is at the top of mind.
The eZonomics article on availability bias explains how it can apply to investments involving bonds, property and other asset types, in addition to shares. Homebuyers might be swayed by news articles suggesting buyers should get in quick amid a rising market to avoid being “priced out”. In these circumstances, it might be helpful to broaden the picture by looking at house prices across a wider time period rather than a month-on-month or year-on-year change and to use other house price measures, such as comparing average wages or the cost of renting to buying.