Social media, news addiction cost returns: Morningstar

Investors addicted to the financial news cycle and social media hype tend to time the market and forego substantial returns compared to staying the course, according to Morningstar.

The "hyper-informed" investor is one who incessantly checks stock prices, currency and commodity fluctuations, and financial news, Morningstar director of equities research for Australia and New Zealand Mathew Hodge said, but do so at their own peril.

For one, investors tend to use smartphones to absorb such news, leading not only to information overload but anxiety, insecurity, attention deficit disorder, and poorer neck posture and eyesight.

"We think we are diligently keeping an eye on our investments, keeping ourselves informed and being on alert for opportunities. However, in doing so excessively, many of us suffer the same afflictions as those from phone over use, resulting in counterproductive investing behaviour," Hodge said.

Some investors are so addicted to the financial news cycle and "investment market scuttlebutt" that they lose sight of the underlying assets.

Using equities as an example, many investors do not ask how the company makes money, who it competes with and what is the outlook for the industry it operates in.

Hodge said their due diligence revolves around "what is the trend in consensus estimates, who have been the big buyers and sellers of the stock, what is the gossip in the Twitter sphere..."

Tracking $10,000 invested from 31 October 2003 to 4 June 2024, the analysis found that investors who missed the 10 best days of the S&P ASX200 made $33,650. Those who were fully invested for the period made $56,788.

Investors who missed the 10 best days of the MSCI North America made $35,773, while those who were fully invested for the long haul made $78,377.

Those invested in MSCI China on random occasions made $19,955 while investors who stayed the course made $48,612.

"A 'hyper-informed' investor trying to time the market according to prevailing noise is very likely to have missed some of these best days. The consequence is material forgone returns, despite best intentions to outsmart the market," Hodge said.

The GameStop furore in early 2021 underscored the formidable influence of social media platforms on share prices thanks to retail investors gathering on Reddit's WallStreetBets to make big bets on the company, spawning what otherwise became known as a meme stock.

A 2022 study of investors on the Shenzhen Stock Exchange found they use 2.8 channels on average to obtain information.

Social media was the dominant channel accessed by 47.6% of users via cell phones and by 42% via computers, the joint research conducted by the Southern University of Science and Technology, Clemson University, and Renmin University found.

"As such, online stock forums have become an essential way for investors to obtain investment information in addition to traditional media.

"Furthermore, although investors have to a certain extent adopted a more rational attitude, individual investors tend to actively look for 'resonance' in online stock forums, that is information that agrees with their own views or is similar. In order to reinforce the appropriateness of their own views, investors collect such biased information as the basis for their final investment decisions," the researchers found.