12/12/2008 05:12 am ET | Updated May 25, 2011

The Perfect Storm: False Prophets and Bad Advice

October, 2008 was a terrible month. For the prior twelve months, an all stock portfolio racked up losses of more than 43%.

In these troubled times, there is no shortage of advice for beleaguered investors. A well-known advisory firm wrote to its clients that "we have not reached the ultimate bottom" and a "larger rally will have to shake off the "sell the rally" crowd." Other pundits view the meltdown as a "buying opportunity" and are urging their clients to buy stocks "now."

Few of these advisors told investors to flee to cash and avoid the market crash. Do you really have confidence they are right now?

Advisors who want to be honest will tell their clients they have no idea when the markets will "reach the ultimate bottom." All we can realistically do is place the current markets in historical perspective.

Here is some data which is factual and not simply the musings of self-styled market seers.

The two year annualized loss in 1973-1974 for an all stock portfolio was greater than the two year loss for the period ending October 30, 2008 (22% vs. 18.64%).

The worst 4 year annualized loss for an all stock portfolio in the past 50 years was less than 2%.

The 4 year annualized loss for an all stock portfolio for the period ending October 30, 2008 was approximately 1%.

Over any ten year rolling period in the past 50 years, this portfolio never had a loss. Its average annualized return was over 13%.

While no one knows what the future will hold, this data validates a long term strategy of determining your asset allocation and holding a globally diversified portfolio of stocks and bonds using low cost index funds, Exchange Traded Funds or passively managed funds.

Instead of relying on the flawed predictive powers of those who shamelessly peddle this ability, consider this recent study. It reviewed the returns of 2,076 actively managed U.S. open-end, domestic-equity mutual funds that existed at any time between 1975 and 2006.

How many of these fund managers demonstrated the skill necessary to "beat the markets" and add value to their shareholders? A pathetic 0.6%!

What advice are you receiving from your broker or advisor? "Buy stocks" or "flee to safety"?

Here is the ultimate irony:

It is bad enough that they don't have the expertise to give you this advice. It is worse that they encourage you to hold actively managed mutual funds that have a minuscule chance of adding value to your portfolio.

It is the perfect storm: false prophets and bad advice.

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.