Courtesy of Wade of Investing Caffeine
There are approximately 2 billion people surfing the internet globally and over 150 million bloggers (source: blogpulse.com) spewing their thoughts out into cyberspace. Throw in economists, strategists, columnists, and the talking heads on television, and you can sleep comfortably knowing there will never be a shortage of opinions for investors to sift through. The real question regarding the infinite number of ideas floating around from the “market commentators” is how useful or harmful is all this information? These diverse points of view, like guns, can be useful or dangerous – depending on an investor’s experience and knowledge level. Deciphering the nuances and variances of investment opinions can be very challenging for an untrained investing eye or ear. While there are plenty of diamonds in the rough to be discovered in the investment advice buffet, there are also a plethora of landmines and booby traps that could explode investment portfolios – especially if these volatile opinions are not handled with care.
No Credentials Required
Unlike dentists, lawyers, accountants, or doctors, becoming a market commentator requires little more than a pulse. All a writer, squawker, or blogger really needs is an internet connection, a keyboard, and something interesting or provocative to talk about. Are any credentials required to blast toxic gibberish to the millions among the masses? Unfortunately there are no qualifications required…scary thought indeed.
In order to successfully navigate the choppy investment opinion waters, investors need to be self-aware enough to answer the following key questions:
• What is your investment time horizon?
• What is your risk tolerance? (see also Sleeping like a Baby)
With these answers in hand, you can now begin to evaluate the credibility and track record of the market commentators and match your personal time horizon and risk profile appropriately. Ideally, investors would seek out prudent long-term counsel, but in this instant gratification society we live in, immediate fear and greed sells advertisements and attracts viewers. Even if media producers and editors of all stripes believed focusing on multi-year time horizons is most beneficial for investors, some serious challenges arise. The brutal reality is that concentrating on the lackluster long-term does not generate a lot of advertisement revenue or traffic. The topics of dollar-cost averaging, asset allocation, diversification, and rebalancing are about as exciting as watching an infomercial marathon (OK, actually this is quite funny) or paint dry. More interesting than the sleepy, uninspiring topics of long-term value creation are stories about terrorist threats, DSK sex scandals, Bernie Madoff Ponzi schemes, currency crises, hacking misconduct, bailouts, tsunamis, earthquakes, hurricanes, 50-day moving averages…OK, you get the idea.
Focus on Long-Term and Do Not Succumb to Short-Termism
Regrettably, there is a massive disconnect between the nano-second time horizons of market commentators and the time horizons of most investors. Moreover, thisshort-termism dispersed instantaneously via Facebook, Google (GOOG), Twitter, and traditional media channels, has sadly infected the psyches and investment habits of ordinary investors. If you don’t believe me, then check out some of the John Bogle’s work, which shows how dramatically investors underperform the benchmark thanks to emotionally charged reactions (see Fees, Exploitation, and Confusion Hammer Investors).
Although myopic short-termism is not the solution, extending time horizons too long does no good for investors either. As economist John Maynard Keynes astutely noted, “In the long run we are all dead.” But surely bloggers and pundits alike could provide perspectives in multiple year timeframes, rather than in multiple hours. Investors would be served best by turning off the TV, PC, or cell phone, and using the resulting free time to read a good book about the virtues of patient investing from successful long-term investors. Stuffing cash under the mattress, parking it in a 0.5% CD, or panicking into sub-2% Treasuries probably is not going to get the job done for your whole portfolio when inflation, longer life expectancies, and the unsustainable trajectory of entitlements destroy the value of your hard-earned nest egg.
Investment Commentators Look into Politician Mirror
Heading into a heated election year with volatility reaching historic heights in the financial markets, both politicians and investment commentators have garnered a great deal of the media spotlight. With the recent heightened interest in the two fields, some common characteristics between politicians and investment commentators have surfaced. Here are some of the similarities:
- Politicians have a short-term incentives to get re-elected and not get fired, even if there is an inherent conflict with the long-term interest of their constituents; Investment commentators have a short-term incentives to follow the herd and not get fired, even if there is an inherent conflict with the long-term interest of their constituents;
- Many politicians have extreme views that conflict with peers because blandness does not get votes; Many investment commentators have extreme views that conflict with peers because blandness does not get votes;
- Many politicians lack practical experience that could benefit their followers, but the politicians have the gift of charisma to mask their inexperience; Many investment commentators lack practical experience that could benefit their followers, but the commentators have the gift of charisma to mask their inexperience;
Investing has never been so difficult, and also has never been so important, which behooves investors to carefully consider portfolio actions taken based on a very volatile and inconsistent opinions from a group of bloggers, economists, strategists, columnists, and various other media commentators. Investors are bombarded with an avalanche of ever-changing daily data, much of which is irrelevant and should be ignored by long-term investors. As you weigh the precious value of your political votes in the upcoming election season, I urge you to back the candidates that represent your long-term interests. With regard to the financial markets, I also urge you to back the investment commentators that support your long-term interests – the success of your financial future depends on it.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
