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Bad and Good Advice About the "Fiscal Cliff"

11/20/2012 07:14 pm ET | Updated Jan 20, 2013
  • Dan Solin Author of the Smartest series of books

If I hear "fiscal cliff" one more time, I will consider jumping off a real cliff. The financial media is in hyperactive overdrive, breathlessly dispensing what passes for investment advice. Here are some typical examples:

Over at CNBC, Jim Cramer told his viewers to buy Cisco Systems (CSCO), Home Depot (HD) and PetSmart (PETM). He believes these stocks, among others, would be trading higher if the fiscal cliff was resolved. His logic is simplistic: These stocks are "recession proofers" and "big yielders."

Yahoo!'s Breakout had Todd Schoenberger, managing principal of The BlackBay Group, as a guest on its Nov. 16 show. Mr. Schoenberger commented on the recent decline of Apple stock. He noted ominously that "[A]pple is a true proxy of the global economy."

Sam Collins, the "Chief Technical Analyst" at InvestorPlace, believes "fiscal cliff confusion" creates a "buying opportunity" for CVR Partners LP (UAN). He notes the stock may be "... a temporary victim of fiscal cliff negotiations."

I am sure you get the drift. Unfortunately, many investors will act on this advice, which is unfortunate.

In stark contrast to the musings of these pundits, Allan Roth provides sound advice in his Nov. 12, 2012 CBS MoneyWatch blog. Roth correctly notes that the approaching fiscal cliff is "not exactly a secret" and "thus the possibility is already priced into the market." There is no reason to believe that stocks are mispriced or that self-styled "experts" could identify them even if they were.

Next, he observes that the market often acts in a way that is contrary to conventional wisdom. He uses the downgrade of U.S. debt in 2011 as an example. You would think lower-rated U.S. Treasury bonds would make it more expensive for the government to raise funds. In fact, bonds "soared" making it "much cheaper" for the government to borrow.

If you are really worried about what it going to happen in the stock market in the next month or two (or even over the next several years), you have no business owning any stocks.

The "fiscal cliff" is being used by the financial media and many brokers and advisers to justify short-term recommendations based on their purported ability to predict the future, time the market and pick stocks to buy or sell. Neither they nor anyone else has this expertise. Relying on their advice is not responsible investing. Don't let the "fiscal cliff" turn into a financial disaster for you and your family.

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.