(from Dan Solin’s Huffington Post blog on February 11, 2014. Click here for the original article. Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His next book, The Smartest Sales Book You’ll Ever Read, will be published March 3, 2014.)
It has long been my view that investors would be better off if they paid no attention to the financial news. Unfortunately, this is difficult to do and almost counterintuitive.
The core of the problem is the media need to fill up time and pages with fresh news or they won’t be able to capture your attention. Much of the “news” is of little help to investors. Often, it is misleading and harmful.
Financial data is notoriously easy to manipulate. As this article from Vanguard recently noted, a difference of only one year can have a major effect on the five-year annual performance returns of U.S. stocks. If your starting point is 2013, this number is an impressive 18.71 percent, because it omits the big drop in 2008. But if you ran the numbers just one year earlier, from December 31, 2012, the five-year average return number dropped to 2.04 percent. Vanguard correctly concluded that basing investment decisions on “data-dependent snapshots” could be a big mistake.
Much of the financial news consists of “insiders” or “investment professionals” giving us their views about underpriced stocks or stocks that fly under the radar, implying that these stocks are good buys. No one seems to question how stocks featured on major television shows or splashed across the Internet can continue to remain secret.
What I term “investment babble” is best exemplified by the endless predictions made by those with purported expertise. Here’s one of many examples:
An article in The Daily Mail dated January 1, 2013, by Philip Whiterow carried a prediction in the headline that gold was “set to shine even more brightly in 2013.” It noted: “A raft of commentators, brokers and industry participants predict it will climb higher, topping $2,000 and even rising as high as $2,500 by the close of 2013.”
Whatever “raft” these commentators, brokers and industry participants were on must have sunk. The price of gold dropped to a little more than $1,200 at the end of 2013. Don’t look for a mea culpa from Mr. Whiterow. He was just doing his job, which is to keep up the flow of financial babble required by his employer.
The most insidious message disseminated by the financial media is that there are “investment professionals” whose views about the future are of value to investors.
You would think institutional investors would be the best of the best, given their responsibility to manage trillions of dollars and their access to top-flight research, analysts and fund managers. A recent article in Pensions & Investments reported that 84 percent of institutional investors surveyed said hedge funds met or exceeded their expectations in 2013.
They must have had very low expectations. The HFRX Global Hedge Fund Index earned a paltry 6.7 percent in 2013, substantially underperforming the S&P 500 index which returned 32.4 percent. As my colleague Larry Swedroe noted, the perils of investing in hedge funds are many. They include “lack of liquidity; lack of transparency; loss of control over the asset allocation and thus risk of the portfolio; non-normal distribution of returns (they exhibit excess kurtosis and negative skewness); and they have a high risk of dying (12.3 percent per year from 1994 through 2008).”
Nothing illustrates the peril of relying on “investment pros” more graphically than their continued reliance on alternative investments.
I know it is very difficult, but a worthy resolution for 2014 (and beyond) would be to ignore much of the financial media. For sound, research-based investment advice you can rely on, check out books by me, Swedroe, William Bernstein, John Bogle, Rick Ferri and Burton Malkiel.