THE BLOG
10/15/2013 07:06 pm ET | Updated Jan 23, 2014

Best and Worst Investing Advice During the Shutdown

This is a busy time for financial journalists and advisers. The government shutdown and the looming prospect of an unprecedented default by the U.S. Treasury in meeting its obligations have rattled investors. They are seeking answers.

When looking for advice about investment-related subjects, it's important to keep in mind the different obligations of the person providing it. Here's a summary:

Brokers have an obligation to provide advice that's merely "suitable" for their clients. They don't have to act solely in the best interest of their clients. For example, a proprietary mutual fund may be "suitable," even though it has a much higher expense ratio (management fee) and a lower expected return than a comparable, less expensive index fund.

Registered Investment Adviser firms have a fiduciary duty to always act in the best interest of their clients. In the example discussed above, advisers with an RIA firm would violate their fiduciary duty if they recommended the proprietary fund.

The financial media have no legal obligation to viewers or readers other than what is imposed by common law (such as laws relating to libel, slander and defamation).

The financial media's lack of a high legal standard explains the wide swing in the quality of the information it disseminates. Here's a prime example:

Sound, Responsible, Evidence-Based Advice

My colleague Larry Swedroe wrote two blog posts discussing how the government shutdown and potential default should affect your investment plans. You can find them here and here. Swedroe is a highly respected author or co-author of 12 books on investing. Here's a summary of his views:

  • No one can predict the consequences of a default.
  • Major financial crises (including government shutdowns) occur with surprising frequency.
  • Stick to your investment plan and be prepared to suffer through periods of volatility "without panicking and selling."

Swedroe concludes with this sage advice: "The real problem for investors is that while it's tempting to think we can benefit from jumping in and out ahead of the news, there's no evidence that you, or anyone else, can forecast with greater accuracy than what's referred to as 'the collective wisdom of the market.' "

Terrible, Irresponsible Advice

At the other end of the spectrum are those who seek to profit from the current crises by encouraging investors to do the opposite of what Swedroe recommends: Panic, sell, engage in market timing and stock picking. Enter Jim Cramer.

In a shameful, irresponsible segment aired on his Mad Money show, Cramer counseled investors to "think about the unthinkable" and gave "advice" about how to prepare in the event there is no debt deal. His "insights" included:

  • An observation that "Wall Street" has designated some stocks (such as Costco, ConAgra and Coca-Cola) as "safety stocks."
  • A recommendation that investors consider stocks such as Johnson & Johnson and Procter & Gamble. The explanation for this, given on CNBC's website, is because these stocks have "fundamental catalysts in their favor as well as the rotation." Candidly, I have no idea what that means.

Unlike Swedroe, Cramer offers no historical data indicating that stock picking and market timing are prudent strategies. Even if they were, I am aware of no credible evidence that Cramer's stock recommendations are likely to be more accurate than those of a monkey throwing a dart at a board.

Swedroe did a comprehensive analysis of Cramer's stock picking ability in this blog post. He referenced peer-reviewed studies (something Cramer never does) that found that volume soars when Cramer recommends a stock, but profits quickly disappeared. Swedroe concluded that "after costs Cramer's picks have negative value to investors who act on the buy recommendations."

Here's the underlying problem. Many investors are unable to distinguish between sound, evidence-based advice disseminated by Swedroe (and others such as Carl Richards, Jason Zweig, John Wasik, William Bernstein and John Bogle) and the wacky entertainment provided by Cramer. Especially in times of crises, those who succumb to Cramer's nonsense may find their retirement dreams seriously affected. For CNBC and Cramer, it's apparently of little concern, as long as those advertising revenues keep rolling in.

It's a sad state of affairs.

Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His next book, The Smartest Sales Book You'll Ever Read, will be published March 3, 2014.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

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