THE BLOG
09/16/2014 05:16 pm ET Updated Dec 06, 2017

The Real Secret of Successful Investors

Historical market data are often misused by pundits who believe they can predict the future by looking at the past. Much of what counts these days as "financial news" is simply a parade of self-styled "pros" peering into their crystal balls and telling the rest of us how to time the market, pick outperforming stocks or select "hot" mutual fund managers.

It's sad that so many investors base investment decisions on these musings, because it hasn't worked out well for them. The only beneficiaries of this charade are "market beating" brokers, active fund managers and the financial media, which derives revenue from stoking fear and anxiety.

Investors' poor performance

Richard Bernstein of Richard Bernstein Advisors looked at 20 years of historical data. You can find the results in a chart he prepared here.

Bernstein found that the performance of the typical investor for the period from Dec. 31, 1993, through Dec. 31, 2013, was "shockingly poor." The average investor had an annualized return of about 2.2 percent. This pathetic return underperformed every asset class except Asian emerging markets and Japanese equities. Even short-term Treasury Bills, the equivalent of holding cash, had higher returns.

Bernstein concluded that investors "consistently bought assets that were overvalued and sold assets that were undervalued."

Nuveen's Bob Doll reached a similar conclusion after examining 20-year annualized returns by asset class for the period from 1992 through 2011. The average investor had returns of only 2.1 percent during this period, significantly underperforming the S&P 500 index (7.8 percent) and even inflation (2.5 percent).

The key to outperformance

According to a blog post on Business Insider, Fidelity did a study to determine which accounts performed the best. It found that people who forgot they had an account at Fidelity (and therefore didn't buy or sell) outperformed other accounts. It appears, at least for Fidelity, that no advice was the best advice, which is a very sobering thought.

There's also anecdotal evidence that families fighting over inherited assets, who were prohibited from doing anything with those assets for 10 or 20 years as the argument played out, later found this period of inactivity outperformed all other periods.

The welcome decline of CNBC

CNBC used to be the epicenter of financial news. Unfortunately, it misused its privileged position and the network now serves as little more than a 24-hour infomercial for the securities industry that supports it.

Recently, Art Cashin has been running neck and neck with Jim Cramer for the dubious distinction of who can mislead investors more. But Cramer is tough to beat. One of his latest observations, that a "newfound supply" of offerings has become the "elephant in the market," is typical of his desperate efforts to remain relevant.

However, my personal vote goes to Cashin, who once described one day of bullish activity in the market as a "melt-up." A close second in the moronic musings category was his comment that "nervous" investors "tiptoe through Halloween."

Here's the silver lining: Viewership at CNBC has plunged to a 21-year low. Its Nielsen rating for August was the lowest-rated month in its core demographic since February 1993. During that month, viewers aged 25 to 54 stayed away in droves, with only 28,000 tuning in.

While you still have to sympathize with the 28,000 investors who still confuse CNBC with legitimate financial news, the trend is clearly going in the right direction.

Here's the takeaway for investors who are relying on the media for insight and direction. It's time to fundamentally change the way you invest. There's no excuse for not capturing the global returns of the market, which are yours for the taking.

The first step is to ignore the financial news.

2014-04-01-Hiresfrontbookcover.jpgDan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth advisor with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is The Smartest Sales Book You'll Ever Read.

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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