Smart Advice for the HuffPost Investor: Bad Advice From HuffPost Investors

I am really pleased that my column has spawned such a spirited discussion about investing. Unfortunately, some readers, who are no doubt well intentioned, give advice with great confidence which is simply unfounded.

It is not unlike the advice of many brokers, financial advisors and TV talking heads that inundates investors with conflicting and ill-based views on a daily basis.

It is not surprising that investors are so confused. You have to wonder whether this advice -- which frequently advises trading of one kind or another -- is motivated by the fact that the securities industry is estimated to make $500 million a day in commissions and related fees. If there was a steady drumbeat advising investors to buy and hold a globally diversified portfolio of index funds, not only would ratings go down, but fees would fall as well.

Only investors would benefit!

Please continue to add your questions and observations as Comments to this blog.

Question From: Halsey (extracted):

If you see a headline on Time or Newsweek..saying "recession"...get that money invested... When they put a BULL on the cover.. sell...

Halsey,

You are recommending a form of market timing, e.g. sell on good news and buy on bad news.

There is no data to support this advice.

There are many studies indicating that market timing does not work. One study of 25 market timing newsletters, as reported by Business Week, concluded that none of them beat the markets. Investors who followed the advice of these professional market timers significantly underperformed the S & P 500 and the Wilshire 5000. The newsletters studied included some of the best known and most popular ones.

Surely, these "professional" forecasters were aware of the very simple formula you recommend, and much more sophisticated ones.

The bottom line was stated by Charles D. Ellis, author of Winning the Loser's Game: "Market Timing is a wicked idea. Don't try it --- ever."

Question From: realitytrumpsbull (extracted)

If you want to win on the stock market, invest in: oil(duh) drugs Health insurance companies Health supplies defense companies.

realitytrumpsbull,

You are recommending stock picking. A premise of your recommendation is that stocks in the sectors you list are underpriced. Why do think this would be the case since all relevant information about these stocks is in the public domain in plain view of millions of traders, many of them professionals?

There are many studies demonstrating the poor track record of "professional" stock pickers, let alone amateurs.

One study looked at the performance of 71 mutual funds whose investment styles roughly paralleled the S & P 500 over a 10 year period. Only two of these funds beat the index.

In another study, Vanguard founder John Bogle found that only nine out of 355 equity funds beat their benchmark over a period of 30 years.

There are many similar studies.

Stock picking is a loser's game for most investors.

Question From: LammertMacroeconomics

31 January 08 -Two Cents About the Ubiquitous Nature of Macroeconomic Saturation Quantum Fractals. New Century has had remarkable growth in the last 22 trading days, rising from 0.7 pennies to 2 cents, a nearly 200 per cent increase. By comparison the average share of the Wilshire at 1378.55 has loss substantial dollar trading power in the last 22 trading days. This odd couple of great entity and vanishing small entity share the end effects of malinvestment valuation and inherent valuation fractal decay patterns. Both New century and the Wilshire will see a change of fortunes over the next 6 trading days. For New Century from 23 August 2007 the decay fractal pattern is 15-16/38-40/38-40 days with 11 days of the third decay fractal forming the base for its ..next decay fractal sequence: 11/22 of 28/ 25-28 days; for the Wilshire: 10/19 of 25/25 days. Nonstichastic causality is everywhere .... and inescapable.

LammertMacroeconomics,

I understand the psychological allure of penny stocks: You can own a large number of shares for little money. There is the possibility of huge gains.

Unfortunately, for most investors in these stocks, they are economic suicide.

Studies have shown that penny stocks have worse performance than the markets, but greater volatility. Kind of a perfect storm for financial disaster.

They are also more prone to stock manipulation which may cause a temporary spike in the price of these stocks, followed by a precipitous decline.

The Securities and Exchange Commission warns that penny stocks can be "very risky" and that "investors in penny stocks often are unable to sell stock back to the dealer that sold them the stock."

Investors would be well advised to avoid penny stocks and to view with great skepticism justification offered for them based on purported technical analysis.

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.

Comments

[cylindar]

Do you still hold the view that we are not in a recession?

[AmericanFool]

One more point - being 100% in equities only makes sense if you are young. As you get older, bonds will help protect your principle. If you will need your money within 30 years(!) you better have some bonds in the mix to help preserve your capital, otherwise you are flying without a parachute.

[AmericanFool]

Mr Solin's approach is solid and smart and has been proven out many times over. If the markets don't interest you, stop reading, you know what you need to do. Diversify in Index funds and rebalance annually or so. However, if you think investing is fun and interesting... Ken Fisher (Forbes 500 Investment Manager) advocates adjusting your allocation of investments to a benchmark. The only reason to vary from the benchmark is if you know something others don't. This advice has served me in good stead; I'm in a 401K & I vary my asset allocation somewhat and have beaten the dividend-adjusted S&P 500 5 years in a row, by just a few points per year. The market is usually a wild ride, and I'm prepared for that. The key is RELATIVE performance. All key equity indexes return about 10% over time, if you count reinvested dividends. Equal or beat that and you are golden. I limit my risk by taking educated guesses with no more than 30% of my portfolio. There is a significant element of luck in my recent results, I only hope to beat my benchmark 70% of the time at most, not 100%, but the key is I'm comfortable with my level of risk. In general I'm 100% in equities. I can handle the ups and downs, I rode out the dot.com crash 100% in equities and still have a long term annual avg return over 9% for my portfolio. The worst thing you can do is panic and sell. Always have a plan, even if it's just to ride out the bear market.
I repeat, I allocate my assets per my benchmark to ensure market returns, unless I know something that gives me an edge, and I know how and why most everyone else is mistaken. I'm not a speculator or a market timer. I do know something about broad economic trends, and I use that to my advantage with limited bets.

[InternationalObserver]

"... At the risk of running afoul of Mr. Solin's admonition about well-intended, but wrong-headed, advice, I think I'm on safe ground sending you to the site I believe he is associated with. ;-) ..."

==========

Will we have to wait until Mr Solin's next blog to find out if the above claim is true? Or should we just click onto those links now and dive into the funds they recommend ...?

[emerywood]

Dan's diversified index fund portfolio has a safeguard in a down market like today's. If one would hold on and don't sell out, there is a good chance that the market will come back one day and all index funds will rise. If one holds individual stocks, the chance of all of them coming back to the same level someday is most unlikely. Some may even become worthless, like Enron in 2000. In a bull market, holding the right stocks beats index funds though.

[vipersdad]

This is a great an very timely posting - thanks for doing this. I am constantly amazed to hear the financial "experts" bemoan the lack of "discipline" of non-professional investors while simultaneously bidding up stocks on companies who have awful fundamentals. People have to understand that unless you have a large amount of leverage, many of the strategies employed by professional investors don't work well for the average Joe. There is ALMOST NEVER any such thing as "fast money," Best Bet (one I have my money on) is slow-and-steady growth and lots of diversification. I know that sounds boring but I am living proof it's a winner.

[Cathexis]

Picking specific stocks is almost invariably a bad idea, IMO. So are most forms of timing (admission: When Lucent went from $82 to $15.75, I reasoned that such a quality stock just COULDN'T go lower! I was painfully wrong and finally got out around $3).

Low cost index funds are my vehicle of choice in almost every case, since then. There will be times I deviate from that (for example now, when I have shifted portions to non-equity "stability" funds, prioritizing capital preservation over growth). However, I am aware of the potential for "opportunity loss" and am comfortable with that risk.

[realitytrumpsbull]

Isn't everyone who doesn't have a million in 'investment capital' pretty much just contributing to a bad habit, here? I'll bet they've got somebody's kid with a crayon wired to one of those tracking board things, and they
give him a big piece of paper...don't color outside the lines, Billy!, and that's how they get their stock tracker thing. Maybe it's an average of their Defender scores or something...

[Manji]

For Baby Boomers,retiring within 1 yr &
30 years Longterm Horizon....
What would you suggest for current Income stream with Inflation & other Risk like Health care cost,market Risk ?
Income or Index funds,Tips,CEF,ETF with current Yield portfolio ?