As the market continues its bull run to record highs, investors are inundated with advice. Most of it focuses on whether they should buy stocks and participate in the upside, or "take their profits off the table" to avoid what some believe is an imminent market crash.
Sound investment advice is often buried in financial journals. Investment pornography is far more readily available and is freely dispensed by the mainstream media. Here's a recent sampling of both.
Solid Investment Advice
Burton Malkiel, the author of the seminal book A Random Walk on Wall Street, is a consistent source of sound investment advice. In an op-ed column in The Wall Street Journal, Mr. Malkiel compared the increase in management fees charged by actively managed funds with lower fees charged by index funds and exchange traded funds. He noted the false perception of investors who believe higher fees equate to better performance. The reality is the opposite. Malkiel correctly notes: "Actively managed funds of publicly traded securities have consistently underperformed index funds -- by roughly the differential in fees charged."
William Sharpe is a professor of finance, emeritus at Stanford University's Graduate School of Business and the winner of the 1990 Nobel Memorial Prize in Economic Sciences. In an article in the Financial Analysts Journal, he concludes that investors who invest in index funds should have more wealth than those who purchase actively managed funds. The difference can be as much as one-third of a retirement portfolio over a 30-year period.
Vanguard's chief economist, Joe Davis, noted the lack of any reliable predictor of future stock market returns, especially over the short term. Over longer time periods, the correlation of even the best predictors is less than 50 percent, which puts it in the random category.
Purveyors of financial pornography understand that fear and greed generate readers and viewers. They are not concerned with data and facts, nor are they dissuaded by the Vanguard analysis that debunks the myth that anyone has the skill to predict the direction of the markets.
Larry Fink, chairman and CEO of BlackRock told CNBC he believes the bull market in stocks has another five to six years left, with the possibility of 8-10 percent annual growth. This would equate to the DJIA reaching 28,800 in 2019 at the high end of these predictions.
Apparently, Mr. Fink did not read the interview with Vanguard's chief economist.
Unfortunately, given his exalted position, many investors will assume (incorrectly) that Mr. Fink has some special insight on the direction of the markets and will be guided by his advice. Mr. Fink may be right or wrong, but his opinion is no more reliable than that of a monkey throwing a dart at a board. According to Vanity Fair, his faulty prediction in 1986 about the direction of interest rates cost his employer $100 million.
In December 2012, a Bank of America technical analyst predicted "... the risk of a bear market in excess of 20 percent beginning in 2013." The S&P 500 Index is up 16 percent year-to-date.
Fredrik Nerbrand, who is described as the "global asset guru" for HSBC, sees "evidence of a cyclical downturn."
What's an investor to do, when confronted with all this conflicting advice? It's simple: Ignore it.
Instead of worrying about things you can't control, and which cannot be reliably predicted (such as the direction of the markets), focus on those you can (such as fees and costs). Pay no attention to "experts" who claim to have a predictive ability that doesn't exist. Instead, follow the sage advice of Malkiel, Sharpe, Vanguard and others. Invest in a globally diversified portfolio of low-management-fee index funds in an asset allocation suitable for you.
Separating investment advice from financial pornography is the critical first step towards intelligent and responsible investing.
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.
The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.