Financial News Is Destroying Your Wealth

05/03/2011 08:35 pm ET | Updated Jul 03, 2011
  • Dan Solin Author of the Smartest series of books

Almost anyone can be a financial pundit. Unlike legitimate professions, no formal training or certification is required. If you have a web cam, you can call yourself a "financial professional" and offer your opinions on a wide range of financial subjects. Unfortunately, some investors will rely on your "expert opinion", and suffer the inevitable consequences.

A recent interview with James Altucher on Yahoo's Daily Ticker illustrates everything that is wrong with financial journalism. It's not easy to do that in one interview.

Mr. Altucher's biography is informative. He is former president and founder of Stockpickr LLC, a wholly owned subsidiary of and a managing partner at Formula Capital Management, LLC, an "alternative asset management firm" that runs a fund of hedge funds. According to the SEC website, Formula Capital is no longer registered with the SEC and is not required to update its Form ADV.

This is an odd background for someone who makes financial predictions. There is no data indicating stock pickers are skillful rather than just lucky. Their percentage of "winners" is typically less than what you would expect from random chance. Hedge funds make no sense for anyone other than those who manage them. Hedge "fund of funds", where the fund manager takes a cut of the fees for pretending to have the ability to pick outperforming hedge fund managers, are even more tenuous.

These thin credentials did not deter Mr. Altucher from confidently predicting that the Dow is going to 20,000. He may be right or wrong, but neither Mr. Altucher or anyone else can predict the direction of the markets. Legendary investor, Benjamin Graham, who was co-author of the investment classic, Security Analysis, summarized the views of those with legitimate credentials: "If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market."

Mr. Altucher proceeded to make matters worse. Even though his crystal ball tells him the markets will continue their remarkable bull run, he advises investors to avoid stocks. Why? Because it's "too hard." There is "too much competition...The very best investors in the world can only consistently produce 10% to 15% annual returns, so what hope is there for the rest of us?"

This is errant nonsense, which is easily contradicted by reams of data. But data can be dull and Mr. Altucher is a colorful character who does not want to get bogged down with boring details.

While he makes a passing reference to buying index funds for those "really determined" to own stocks, here's what he leaves out. Intelligent investing is really easy. Capturing the returns of the global marketplace can be done by anyone. All you need to do is purchase a globally diversified portfolio of low management fee index funds in an asset allocation suitable for you. I told investors precisely how to do this in 2006 when I wrote The Smartest Investment Book You'll Ever Read. I recommended the purchase of only three index funds from Vanguard, Fidelity or T. Rowe Price. How difficult is this?

Using this "no-brainer portfolio" and assuming you invested 100% in stocks (which is far too aggressive for most investors), your returns would have been approximately 7% annualized over the past 10 years and almost 10% over the past 20 years.

Mr. Altucher's concern about "competition" is hopelessly wide of the mark. You do not have to compete with any other investors to obtain the returns of the global marketplace. Over the past 50 years, if you bought a globally diversified portfolio of stocks and held for a ten year period, your average annualized return was over 12%, which is what Mr. Altucher wrongly states was attainable by only "the very best investors in the world."

Mr. Altucher fails to note the consequences of not investing in stocks. You will suffer the ravages of inflation and taxes, which practically insures your portfolio will lose money. Does this seem like an intelligent investment strategy?

There is a logical inconsistency in Mr. Altucher's advice. Since he is so confident of his ability to predict the Dow reaching 20,000, wouldn't it make sense for his clients to be fully invested during this bull run? Presumably, he could tell them (and others) when to exit the markets before the next crash. The reality is neither he, nor anyone else, has this predictive ability.

Mr. Altucher's views, and those of other financial pundits, is long on musings and short on data. You may find him and his colleagues entertaining to watch, but relying on their psychic predictions and wrong-headed conclusions is harmful to your financial health.

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.

A previous version of this post misidentified James Altucher as the president of Stockpickr. He is the former president of Stockpickr.