THE BLOG
05/11/2010 10:25 pm ET Updated May 25, 2011

Worst Advice in the World for Volatile Markets

Volatile markets bring out the worst in the financial media. They are so excited about all the attention they are getting, they feel compelled to provide endless, nonsensical advice to their beleaguered readers and viewers.

Let me ask you this question: Why do you pay any attention to them?

I can't recall hearing the financial pundits predict the dramatic drop we experienced in the Dow this week. And few of them advised us to short the markets, or that the run-up (which they also did not predict) was a "selling opportunity."

Oddly, when the markets go bonkers, the networks turn to the same "experts" to explain what's going on to viewers who were blindsided by their previous advice. It's not surprising that the new insights are just as defective as the old advice. Here are the most common categories of flawed advice inundating investors:

1. The bull market is ending.

I see. You have the ability to time the markets. You know when it is going to up or down. You are very unique. Every study I have seen of the track record of market timing gurus is dismal. If someone had this expertise, wouldn't you think they would publish their track record so we could all marvel at it? Instead, legendary investors like Benjamin Graham have observed the opposite: "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."

2. Flee to safety.

Why are you "fleeing" to anything? Unless you are gambling, you have no exposure to stock market risk if your time horizon is less than five years. You don't care what is happening today or tomorrow in the markets. If you have a longer time horizon, you have an appropriate asset allocation, which permits you to ride out the lows and wait for the markets to recover.

3. Focus on stocks that will not be affected by the global financial crises.

Why would you "focus" on any individual stocks? You know the expected return of an individual stock is about the same as the index to which it belongs, but with significantly greater risk because of "idiosyncratic" or company-specific risk. You are better off sticking to a globally diversified portfolio of low cost index funds.

4. This is a "buying opportunity" for a specific stock.

Really. Why are you so lucky? Do you believe the stock is priced too low by the market? What information about the stock do you know that is not public and taken instantly into account in pricing the stock? Down markets may or may not be a "buying opportunity" for any particular stock. However, you have no way of knowing, which means the risk is high that you might be wrong. Taking big risks is gambling, not investing.

5. Buy gold.

So you believe that gold is mispriced? It is hardly a secret that the world is beset with a financial crises. Don't you think that has been factored into the current price of gold?

Don't get me wrong, I don't have a clue about the future price of gold. Every portfolio should have a percentage allocated to commodities, including gold, as well as all other asset classes. This issue is not "should you own gold?" It is, "should you overweight your portfolio in gold?"

If you decide to do so, you should be aware of the risk you are taking.

All of the advice has one theme in common: You must do something now! Intelligently constructed portfolios don't take the temperature of the markets daily and act accordingly. They change when the investment objectives and tolerance for risk of the investor change. Investors control their portfolios. The media turns this basic principle on its head and encourages investors to let the markets control them.

Don't fall into this trap.

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.