Volatility is a natural part of investing.
Companies that make up investment markets are constantly influenced by a wide range of external factors – economic conditions, political developments, global events, and more. These are forces outside the control of any single business or investor, and they contribute to the market’s inevitable ups and downs.
Importantly, this volatility is also what underpins the relationship between risk and return. In simple terms, taking on some level of risk is necessary to achieve long-term returns. While market fluctuations can be unsettling in the short term, they are a normal and expected part of the journey toward growing your wealth.
A landmark study showed how news can affect investment behaviour
In 1989, a Harvard psychologist, Paul Andreassen, carried out a study into behavioural decision-making, specifically related to investing and how financial news can affect investor behaviour.
His findings provided some fascinating insight into how that behaviour can be affected by news reports.
Students from the Massachusetts Institute of Technology (MIT) were split into two groups and asked to analyse financial information, and then decide if they would buy or sell certain stocks.
The first were given the stock prices and a series of financial news reports about the relevant companies. In contrast, the second group were only given the stock prices.
Perhaps surprisingly, the second group outperformed those who were provided with the regular news and reports.
The effect was accentuated when the groups were given stocks with high volatility to consider. The group working with just the stock prices produced twice the returns of the group with access to the news reports.
Too much information can impair your judgement
The results of the study you read about above seem counterintuitive. After all, how can having more information hurt investor returns?
While there is a case that a certain amount of research can help your investment decision-making, having too much information can often prompt you to overreact.
Often, this overreaction manifests itself in action based on your belief that you should be doing something in response to the news and information you are being bombarded with.
In reality, in many cases, the best course of action is to do nothing at all. As the legendary investment sage, Warren Buffett, put it: “You should do nothing when there is nothing to do.”
Often, constantly meddling with your portfolio based on the news you are reading and listening to can do more harm than good and cause you to lose sight of the fundamentals underlying your investment plans.
That’s not to say that you should tune out all financial news entirely. Some of it can be useful from an investment perspective if you treat it with discretion. Often, however, it can become a distraction and prompt you to take unnecessary action.
Don’t assume experts are always correct
In an age of 24/7 news cycles and the ever-present lure of social media, it’s hard to escape from the opinions of experts – actual and self-appointed.
Another US study, reported by ING Bank, reveals why you should take those opinions with at least a pinch of salt, if not a complete bag!
It was carried out by Philip Tetlock, a psychology professor at the University of Pennsylvania, and looked at the effectiveness of experts in different fields.
It revealed that most fail to make predictions that are any more accurate than a non-expert making choices at random.
The study also confirmed that confidence in an opinion being given was absolutely no guide to how accurate that opinion was. Indeed, Tetlock found that fame was the best factor when it came to assessing the accuracy of predictions – the more famous the forecaster, the worse the prediction.
Further analysis has confirmed the outcomes from this study. For example, a Morningstar report found that only 14% of investment fund managers – who are rarely reticent about sharing their opinions – beat their appropriate market index in the 10 years to March 2025.
Ignoring bad news can be good for your wealth
It’s often the case that ignoring financial news will help you avoid unforced errors and prevent you from making decisions that can damage the value of your portfolio and threaten your long-term wealth.
Indeed, it can often be more effective to be sceptical of predictions and do the exact opposite of what would normally be your instant reaction.
As Warren Buffett (again) put it, “… be fearful when others are greedy and to be greedy only when others are fearful.”
A good example of this came at the beginning of April 2025 when President Trump announced his “Liberation Day” and imposed sweeping tariffs on imports into the US.
The chart shows how the ASX 200 reacted, losing nearly 8% of its value in the space of five days:
Source: Google
Much of the financial media reaction was negative, with a series of stories highlighting the “billions being wiped off” the value of shares.
At that time, given the “noise” from the media, it would have been easy to panic and sell at a loss. Indeed, the falling values suggest that many people did just that.
But within the space of less than two months, the ASX 200 had recovered all the value it lost, and added even more to be up 15.2% on 6 June from the low of 7 April. Indeed, it has nearly reached its previous 2025 peak.
Tuning out the bad news and trusting your long-term plan is nearly always the sensible response at times of market upheaval and volatility.
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Please note
This article is for information only, it does not take into account your personal objectives, financial situation, or needs.
Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
All contents are based on our understanding of ATO legislation, which is subject to change.