The Challenges Of Investing In A Modern World (2024)

When speaking about investing, people often make statements to the effect that the tried-and-true investment basics haven't changed in decades: as long as you stick to these principles, you have a good chance of being successful. While this may be true in a few instances—for example, buy low and sell high—the investing landscape has been vastly transformed in most other respects. There are many unique challenges that modern investors face.

Incredible Volume and Speed of Information

Perhaps the most daunting challenge that modern investors face is the sheer speed and volume of information. In the past, solid information about publicly-traded companies was hard to come by outside of the annual and quarterly reports. The Wall Street Journal and a limited number of finance-related publications attempted to collect business news and disseminate it. But this news moved to the greater public at the speed of print (if it reached them at all). In order to be reported, a story had to be significant; even then, it had to be written up, printed, and delivered.

Now, even obscure companies can produce a constant stream of information—from the daily price fluctuations in the stock, announcements, and posts on dedicated message boards. When there is so much information available at any given time, it can be difficult to identify what is really important.

Finding the Right Resource

The difficulty of finding the right resource is tied to the challenge of there being too much information available. As an investor, how do you find the good resources in the crowd? To be clear, having lots of choices and easy access to free resources is an overall win for the modern investor. But research can be daunting when there are so many choices. While investing primarily deals in facts, opinion colors many areas (such as whether technicals matter more than fundamentals).

With time, many investors learn to filter out information and create a select pool of reliable sources that match their investing tastes. Until then, however, it is hard to avoid being overwhelmed by the range and variety of opinions out there.

The Reactionary Market

Even if you have a good handle on quality information, you can still get burned when inaccurate information or basic uncertainty hits the market. Inaccurate information still hits the market, even though the time to correction/exposure is often shorter. Inaccuracies can be honest mistakes, malicious rumors, or even financial fraud on the part of corporations. More importantly, the financial markets are so addicted to the constant information flow that an interruption in the flow or genuine moments of uncertainty can be worse than bad news.

Market reactions have always been extreme, but the increasingly global reach of information has given investors more reasons to overreact (literally on a per hour basis). It doesn't take a great leap of imagination to see good or bad consequences with every headline that pops up in the feed.

The Choices

When does choice become overwhelming? There are conflicting studies about the limits of the human mind when faced with a variety of choices. Research suggests that we chunk choices into a manageable few (between three and eight, for example). This works in an ice cream shop with five types of ice creams. But the world of finance offers far more than eight types of stock investments. When faced with all these choices, we may attempt to find shortcuts to chunk our options down to a few. This is useful, but it may also lead to us discounting the better option. For example, someone looking for regular income may chunk their options down to dividend-paying utility stocks when they may have been better served by a dividend exchange-traded fund (ETF).

The Role of Advertising

The marriage of investments and advertising has been a boon and a bane to investors. On one hand, advertising has helped familiarize investors with a wider range of investment vehicles available today. The modern investor is more aware of the available investments beyond stocks, bonds, and term deposits. Most will be able to explain mutual funds, index funds, ETFs, and probably options and mortgage-backed securities as well.

Knowledge is a great thing, but advertising can sometimes push an investor toward an edge by hyping an investment that isn't necessarily the best fit. Take mutual funds, for example. Quite often, an investor with a limited amount of capital is better off taking the lowest fee investment option (index fund or ETF) compared to higher-fee, professionally managed mutual funds. Advertising, however, can change this relatively straightforward math by playing up the advantages of professional management while failing to mention fees. So, if the professional manager is not up to snuff, then advertising has cost the investors market returns—plus the management fee.

The Bottom Line

It is true that some investors have been successful using traditional methods and simply shutting their doors against the modern world. This list includes famous fund managers Warren Buffet and John Templeton. 

For most of us, however, the flow of information is comforting and helps us feel more confident in our decisions. The trick is finding the right balance when taking in information and turning it into action. In fact, most investors can survive the modern information barrage with some very traditional advice–measure twice, cut once. In other words, take the time to evaluate the information in front of you before making buy or sell decisions.