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I have finished writing the manuscript for: INVESTMENT ILLUSIONS: 12 Common Illusions That Can Sabotage Your Financial Success. It is currently with a copyeditor and sometime next week I will begin working on the final edits. I am still hoping to have this book out by the end of the year. As I have done in past blog posts, I will highlight points I share in each chapter in upcoming posts.
The Illusion of Information
It may sound strange that I refer to the illusion of information. The illusion comes to play not in the information itself, but in the information that we choose to focus on. Some financial information is valuable for investors to make wise decisions, but much of it is toxic. With all the information out there, we can’t possible take it all in. So we must discern which information is valuable for us and which do we ignore.
The illusion is that many investors (ourselves included) tend to focus their time and energy on information/data that is short-term, biased or spurious. Some of the most prevalent examples include market performance, economic reports and “expert” predictions. On the other hand, very little time and effort is spent on information that is both enduring and controllable. Think of a financial plan and our behavior – how we react to all the noise.
The Noisecasters
Newscasters today are mostly just noisecasters. Think about what you hear financial news talking about on an average day. How much of it is enduring? Is it reliable? Is any of it beneficial for long-term investors? The financial media is a great source of noise.
Unfortunately, most financial and economic information appear helpful, and perhaps essential to the informed investor. We aren’t inclined to question its validity or pertinence because we need information in order to analyze a situation. But we first need to ask ourselves if the information is helpful or detrimental to our plan and goals.
Thanks to the availability bias, we are greatly influenced by those things we hear and read most often. The information most available to us has significant influence on our thoughts, opinions and ultimately our decisions. Your client may truly believe in their plan and want to behave rationally, but the frequency and volume of noise can derail even the best of investors.
Beneficial Information
We can’t possibly define every piece of information that is beneficial (or harmful) to investors. Information and knowledge that fits in the below categories will help investors filter the noise and avoid the illusion of information. This is just a quick list – the book provides much more detail for each one:
- Market & Investment Truths
- Your Investment Plan
- Know Yourself
Related: The Illusion of Rationality