It seems like every time you turn on the TV there is someone yelling at you, telling you what stocks to buy and which ones are going down the tube. It’s as if they can predict the future, or at least know something that us lowly investors don’t know. My favorite is when they ask two experts what a recent job report means, and they give completely different answers. It makes it hard to know who you should believe, and what changes you need to be making to your investment portfolio.
24/7 news channels have had to fill their air time with some absurd material, and financial talking heads seems to fit the bill. If you can’t seem to turn off the TV, here are some tips to help you do so.
Active management: We all want to believe that we are better than average. In fact, 93 percent of drivers say they are above average drivers. This is called Illusory Superiority. This is evident in active investment management strategies, in which the manager believes they are smarter than the average investor, and will therefore beat the market. People pay really high fees to these market timers, and yet research consistently shows active managers aren’t able to beat the market. They typically underperform by 1 percent per year. Why? Because they can’t predict the future any better than the rest of us. The talking heads on TV believe they know something that the rest of us don’t, so they graciously share their knowledge. Random thought, but if they really believe what they say, they wouldn’t share it with us… they would just sit back and make a ton of money.
Poor performance: Financial “Experts” like Jim Cramer make a lot of noise, but they are actually not all that good at actually picking stocks. Cramer will recommend buying hundreds of stocks in a given month. Every time you buy or sell, you have to pay a trading fee. Even if you are able to beat the market, you will lose due to the effect of trading costs on your returns. Investors in general underperform the market by a whopping 6 percent because they try to time the market.
Don’t even know you: A colleague of mine likes to say, “Personal finance is more personal than it is finance.” This statement is so true. You shouldn’t take advice from someone on TV that doesn’t know you and your personal situation, especially when it comes to your investment portfolio. In fact, you shouldn’t be taking advice from me either! Not unless we work together and I know enough about you to make recommendations. Always be weary of people making recommendations when they don’t even know who you are. General advice is one thing… making stock recommendations is another.
I understand wanting to beat the market. I wish I could tell my clients that I know how to do so, but it just isn’t possible. The only thing you will get from watching Financial Porn is unnecessary stress. Don’t let the talking heads affect how you manage your personal finances. If you need some assistance, seek out an independent financial planner to help you. But be sure your next step is to turn off the TV!
So what do you think? Do you enjoy the financial media? Have you ever followed their recommendations? Any tips you would like to add? Feel free to share!
Alan Moore is a fee-only financial planner and founder of Serenity Financial Consulting in Shorewood WI. Follow him on Twitter @R_Alan_Moore. You can contact him at alan@serenityfc.com, 414-455-5313, or visit his website at www.SerenityFC.com. Want more education? Download your free guide to the “10 Easy Steps To Securing Your Financial Future Today.”
I don't believe anyone, including the smartest people on wall street, know which stocks are going up and which will go down. In the end, actively managed mutual funds underperform index funds over time. And investing in individual stocks puts too much of your retirement future in the hands of a single company. Just not a good idea.