What CNBC Won't Tell You (Part 2)

As a strategy, ranking stocks so you can dump them when the market goes down is rife with issues. How do you know when the market has bottomed out? How will you know when the market is about the recover so you can buy back in?
09/08/2015 05:02 pm ET Updated Dec 06, 2017

Last week, I discussed how the financial media misinforms investors, especially during periods of extreme market volatility. The endless parade of pundits seeking to "make sense" of the market serves only to stoke fear and anxiety. If you have a well-thought-out financial plan, and are invested in a suitable asset allocation, you would be better served by ignoring the financial media and staying disciplined.

By doing so, you would be acting contrary to the interest of the securities industry, which I believe seeks to stimulate trading activity to maximize commissions. Much of the financial media is little more than a shill for these prodigious advertisers, encouraging short-term trading, which reduces expected returns.

Terrible advice

As usual, a number of financial "gurus" led the charge. Jim Cramer's advice was to do something. An article explaining his approach to protecting yourself in chaotic markets observed that "if you do nothing with your money, you will have a whole lot of nothing to show for it."

But what, exactly, should you do? According to the article, Cramer "has a system of ranking his stocks when things are good" so he can "hedge himself when they go awry." He also thinks it's important to "circle the wagons" on a few high-quality stocks so you can buy them when they go down.

What support does Cramer offer for these recommendations?

None.

This is not surprising. As a strategy, ranking stocks so you can dump them when the market goes down is rife with issues. How do you know when the market has bottomed out? How will you know when the market is about the recover so you can buy back in?

Mutual funds don't outperform in bear markets

Cramer is recommending a form of market timing that involves "taking action" in response to your perception of (or fears about) where the market is headed. If this was a viable strategy, you would think it would be successfully implemented by mutual funds, which have vast resources at their disposal. An active manager has discretion to bounce in and out of stocks and shift from stocks to cash in order to benefit from an actual or future bear market.

However, a white paper from Vanguard found that in three of six bear markets since 1970, active managers failed to outperform the U.S. stock market. The study concluded: "The primary difficulty facing active managers is that in relatively efficient markets, it is difficult to consistently and correctly time market moves and to consistently identify winning investments across market cycles."

Do you think that you and your broker will have better success utilizing the strategy recommended by Cramer than active fund managers responsible for billions of dollars of assets?

Tactical asset allocation funds don't outperform

It's tempting to believe some guru can tell you when to get in and out of the market. That's the premise of tactical asset allocation funds. These funds actively adjust their allocation between stocks, bonds and cash with the goal of creating value by taking advantage of market conditions.

How have these funds performed?

A study by Morningstar reached this conclusion: "Our extended study found scant evidence that these funds delivered on their goal of delivering competitive returns with a smoother ride. Most gained less than the Vanguard fund, were more volatile and prone to downside, or both. This is consistent with our previous findings."

Do you think that you and your broker will have more success reacting to market conditions than these funds?

The peril of predictions

Another contributor frequently appearing in the financial media is Dr. Marc Faber, whose bearish predictions have earned him the nickname of "Dr. Doom." My colleague, Larry Swedroe, recently reviewed Faber's predictions. The results aren't pretty. Here's Swedroe's advice. Note that it is the opposite of Cramer's:

"Thus, my recommendation is that the next time you hear some 'guru' making a forecast, no matter how intelligent it sounds, no matter how cogent the arguments made, tune it out. Do nothing."

What the financial media should be telling you

Here's what the financial media should be telling you (but won't):

  • Don't watch us. The information we provide is harmful to your long-term returns.
  • No one can "explain" the market. It's random and unpredictable.
  • We agree with Peter Lynch, who said: "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections, than has been lost in corrections themselves."
  • Ignore predictions by pundits who populate our programs. They know no more than you do.

Sound advice supported by compelling data. Where's the data for the "advice" freely dispensed on CNBC and in other financial media?

2014-04-01-Hiresfrontbookcover.jpgDan Solin is a New York Times bestselling 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.