Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

If you experience any difficulty in accessing Forsyth Barr Focus,
please call 0800 367 227, or e-Mail editor@forsythbarrfocus.co.nz for assistance.

 

Information vs Noise

In today’s world it’s easy to access information. We can choose to receive a constant stream of it. Twitter alerts allow us to follow news, up-to-the-minute. But with so much available we need to be careful to separate what’s useful… and what’s not.

Let’s look back 30 years. In those days, news flowed much more slowly. Newspapers were still important and nobody had to contend with a constant bombardment of data. So are we better off now than we were then? The answer is generally ‘yes’, but we need to be careful about discerning between information and noise.

To put this in context, let’s draw upon a report on behavioural finance, published recently by one of Forsyth Barr’s global counterparts. In this report they look at potential portfolio return differentials based on how often a portfolio was reviewed.

It turns out that one of the most reliable ways to improve your risk-adjusted return was to look at your portfolio less frequently.

We are all risk adverse but generally state or behave as if we can tolerate short term losses more easily than we can in reality.

In higher risk asset classes this means we may not be able to tolerate short term losses brought about by noise. Accordingly, looking too frequently could undermine the investment strategy and jeopardise the longer-term value of the investment strategy.

Just looking at the US equity market as an example you have a 46% chance of seeing a negative return if you look every day. As the author of the report stated “this is a sure fire way of seeing every twist and turn of your portfolio value”. This is like the commentators who tell us every day why the market went up or down. They have to say something … so even if nothing happened, a story is cited to fit the outcome and becomes fact. What about quarterly? This seems a fairer timeframe but even then the chances of a negative return, is still 32% while annual check-ups would see the chance of a negative return drop to 21%.

Clearly, we do not advocate ignoring information but in a world where we are inundated with data, that data needs to be viewed in context with longer term objectives and whether the data changes this view. If is doesn’t it is noise if it does this is information.

Prevalence of positive or negative S&P 500 rolling returns since 1926

Source: Ibbotson, UBS



By Brian Stewart
Senior Analyst, Strategy