Larry Swedroe: How Media Coverage Impacts Individuals' Investment Flows

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Expert Analysis and Commentary

Larry Swedroe: How Media Coverage Impacts Individuals' Investment Flows

Larry Swedroe Dec 08, 2014



To begin, the authors studied the role of media coverage in investors’ capital allocations to mutual funds. A 2000 survey by the SEC found that more than 40 percent of investors rely heavily on the information derived from mass media when choosing their mutual fund investments. The following is a summary of their findings:

  • Media coverage of mutual fund holdings has a significant effect on investors’ capital allocation decisions.
  • Investors’ capital flows respond to holdings’ past returns, but only if these holdings were covered in widely circulated newspapers in the preceding quarter.
  • Investors allocate significantly more (or less) capital to mutual funds holding media-covered stocks with high (or low) past returns. If a fund holds shares in a high-profile failure, such as Enron, it will face greater outflows than an identical fund holding a stock with a similarly low return but without newspaper coverage. In fact, the returns of holdings that weren’t covered in major newspapers in the trailing quarter don’t impact future mutual fund flows.
  • The effect on flows is driven more by rewarding mutual funds that hold media-covered winners than penalizing funds that hold media-covered losers.
  • Fund flows react to holdings’ returns strongly in the periods after disclosure, but not before. The effect of media-covered holdings on mutual fund flows is driven by the disclosure of those holdings.
  • Investors’ reaction to media-covered holdings is driven by media coverage of stocks rather than media coverage of mutual funds.
  • Comparing returns to risk-adjusted benchmarks, there’s no evidence that investors receive higher returns by investing in mutual funds with media-covered past winners while likely incurring substantial transaction costs from fund chasing.


What the Study Found


Reacting to news from the financial media is among the many mistakes investors tend to make. My book, Investment Mistakes Even Smart Investors Make and How to Avoid Them, covers 77 such errors. Moreover, by the time you have heard or read about any information in the media, it’s almost certain that whatever value it may contain has already been embedded in prices. Thus, whether it’s news about the latest CPI or GNP, earnings reports or the holdings of a certain mutual fund, you’re best served by ignoring it.


The Bottom Line



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