What Investors Can Learn From the Election

Investing responsibly and intelligently means paying attention to peer reviewed data and ignoring the pundits. Market returns are yours for the asking. The securities industry is hoping you won't ask.
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They say that to a hammer, everything looks like a nail. I tend to relate things to investing. There are many lessons investors can learn from the election. Here are two big ones:

Data Matters: As everyone knows, Nate Silver, in his New York Times blog, predicted the results of every state election for president. His data consistently gave Obama an overwhelming electoral vote advantage. Nevertheless, as reported in an article in Forbes, the pundits derided his results, accusing him of everything from being an "ideologue" to running a "numbers racket." On the date of the election, Silver had the probability of an Obama win in excess of 90 percent, yet CNN and others continued to hype a race that was "too close to call."

Even post-election, the myth of a close election continues. Dick Morris, in a limp effort to justify how he wrongly predicted a landslide for Romney, explained that he "... predicted a Romney landslide and, instead, we ended up with an Obama squeaker."

The reality is the final electoral count of 332 for Obama and 206 for Romney is hardly "a squeaker." Morris not only got it laughably wrong, but he can't even admit the reality of Obama's overwhelming win.

I confront the same issue with investors daily. The data supporting the wisdom of investing in a globally diversified portfolio of low management fee index funds, in an appropriate asset allocation, is overwhelming. In its mid-year 2012, Scorecard, Standard and Poors calculated the number of actively managed funds outperformed by benchmarks over various time periods. Here's one significant finding: For the one-year period ending June 30, 2012, 89.84 percent of all domestic equity funds were outperformed by their benchmark. Yet, even with these daunting odds, the majority of investors continue to purchase actively managed funds.

As with elections, the pundits in the financial media (and most brokers and advisers) ignore or spin the data. The moral is clear: You need to ignore the pundits and focus on the data.

Beware of "Experts": The financial media engages in a charade remarkably similar to political pundits. Its daily grist consists of the views of "experts," who discuss the direction of the market, "hot" fund managers and "stocks to watch." Like political pundits, these "experts" often dispense misinformation because it suits their agenda to do so. "Buy index funds" is not compelling television. A daily dose of that advice would cause ratings to plummet. It would also lead to massive outflows from actively managed mutual funds which are major advertisers of these shows.

The underlying premise that financial pundits have the ability to make predictions more accurate than you would expect from random chance is fatally flawed. In a moment of candor, the chief executive of a large asset management firm conceded that the economists at his firm got it right "about three times out of ten." In his excellent book, The Fortune Sellers, William A. Sherden lamented the dismal track record of "experts", noting: "Even with all the advances in science and technology that are available to them, the experts are not getting any better at prediction. In some respects, we are hardly better off than the Romans or Greeks, who read animal entrails to make major decisions regarding the future."

Investing responsibly and intelligently means paying attention to peer reviewed data and ignoring the pundits. Market returns are yours for the asking. The securities industry is hoping you won't ask.

Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book is The Smartest Money Book You'll Ever Read. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

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