24 Mar Bad news and good news
Image from Pixabay on pexels.com
No doubt like many people, last week I found myself watching more of the news than usual. Unsurprisingly given the current situation, I’ve been struck by how unremittingly bad everything seems.
Of course this is nothing new and the news media thrives on telling us about dramatic events which are unusual, and thus newsworthy. After all, they have to keep us wanting to consume their output and apparently people pay more attention, on average, to negative than to positive news. In such circumstances, can we really blame news distributors for riding that trend?
It may also explain the greater sensitivity of investors to losses than to gains in their portfolio, as found by the behavioural finance practitioners.
There is a sound evolutionary basis for a bias towards negative news. When early man was bimbling around on the plains of prehistoric Africa, the chap who was alert to the danger from predators was more likely to survive to pass on their DNA to their successors than the one who focused on the tasty meal in front of them. Ignoring negative information was just plain riskier.
Even since the lowest point of the 2007-9 global financial crisis, there has been plenty of bad news to worry investors and the population at large.
Data source: YCharts
The data is for global equities, as measured by the MSCI World Index including income. What is noticeable if you look at the chart from a distance, or even if you just sample the same data less frequently, is that there is a marked upward trend. In fact the trend is so marked that investors who held their course over that period would have turned their initial capital into more than three times as much over the 10 years. Armed with all that negative news and no chart, I bet not many people would have expected even to have maintained the value of their original investment.
The reason for the positive trend despite the negative news is that not all the news was negative.
Bill Gates once said, “Headlines, in a way, are what mislead you, because bad news is a headline, and gradual improvement is not.” This is exactly the point made by Hans Rösling in his book ‘Factfulness’, which points out that we are so conditioned by the flow of bad news that we are far more pessimistic about the world than the evidence tells us we should be. By ‘we’ in this context, I include just about everyone that he engaged with over his career, including politicians, bankers, industry leaders, journalists and economists.
Data source: YCharts
Part of the reason for our pessimism is that many of the positive things that happen do so slowly and therefore in a non-newsworthy way. Here are some of those things that impacted the perception of enough investors to encourage them to push global stockmarkets higher between 2009 and 2019.
- Advances in medicine
- Increasing transparency for the consumers of financial services
- Reducing costs of financial products
- Continuing scientific discoveries, including graphene, for which two scientists won a Nobel Prize in 2010
- The experience of travel, specifically air travel
- The falling cost and improving capabilities of consumer technology, such as televisions and personal computing
- Google Maps – free and incredibly useful (I found my way round Zurich last year with nothing else)
- High-speed wi-fi, available almost everywhere
- Fuel economy of motor vehicles; average fuel consumption improves every year
- Solar energy is now a viable option, as are other non-carbon energy sources
The greater dissemination speed of bad news compared to good is partly why many investors experience a much lower return than the market delivers. All they needed to do to earn that return was to buy a diversified portfolio inside a low cost fund and hang onto it. However simple this is, it is not easy. To do that would require ignoring the continual stream of news which bombards us every hour of every day if we allow it to do so. The good news, meanwhile, trundles along in the background, out of sight and out of mind.
When we were living in the savannah, giving more weight to danger was a good thing. Unfortunately, that has conditioned our subconscious to give more weight to negative than positive news to the extent that one big negative event can throw us completely off course and disrupt our whole lives and relationships.
It is at times like these that a good planner can really add value to their clients’ lives by reminding them of this and that they have a plan which was designed to cope with inevitable disruptions along the way.