Why You Shouldn't Listen to the Financial Media (and What They Don't Want You to Know)

Here are some thoughts from the wonderful book The Bogleheads' Guide to Investing (I LOVED the book -- see my rating for details) on why you shouldn't listen to the financial media:

Whether it's newspapers, TV, radio, or whatever, all media have one primary goal: to attract and hold an audience. That's the key to making money in a media business. However, when it comes to investing, it's not always a win for the audience.

A few thoughts here:

1. This is one thing I hate about much of the printed personal finance publications out there. They often seem like investment hype-fests. They run through "The 10 Must-Own Mutual Funds," "Hot Stocks for the New Year," and the like issue after issue. It gets old quickly.

2. Listening to and acting on all the advice out there is a recipe for disaster. Not only will it throw you off from your investing strategy, but it will rack up significant investing costs (due to frequent trading), which hamper your overall results.

3. I try to avoid all this noise, but it's hard. When someone makes a compelling argument for an investment, it's in many people's nature (including mine) to want to jump on it. I have to remind myself that by the next issue, they'll have forgotten about this investment and moved on to another one. I can't afford to do that with my portfolio.

4. I often wonder what the total return would be if every paper, magazine, TV show, etc. went back five years and calculated the return for all the investments they'd recommended. I'm sure it wouldn't be pretty. I've seen pieces where magazines went back and reviewed their "recommended" list of investments that were detailed in one article previously, but I've never seen a comprehensive review of all the investments recommended.

5. I try to eliminate investment hype on this blog, but the same rules that apply to other media also apply to Free Money Finance. If what I'm saying doesn't jive with your investment strategy, then it's ok to consider what I say, but don't act on it without thinking whether it's right or not. After all, your money is your money (it's not mine), and you have the ultimate responsibility for it.

Later on in the chapter, the book lists three quick bulletpoints on what the investment media don't want you to know -- all centered around the fact that effective investing can be incredibly simple if you:

• Create a simple, diversified asset allocation plan.

• Invest a part of each paycheck in low-cost, no-load index funds according to your plan.

• Check your investments periodically, rebalance when necessary, then stay the course.

Good advice from the Bogleheads. For mort thoughts on investing, see Best of Free Money Finance: Investment Posts.

Comments

[Duane Gran]

"I often wonder what the total return would be if every paper, magazine, TV show, etc. went back five years and calculated the return for all the investments they'd recommended. I'm sure it wouldn't be pretty. I've seen pieces where magazines went back and reviewed their "recommended" list of investments that were detailed in one article previously, but I've never seen a comprehensive review of all the investments recommended."

One of the problems is that very few of these "buy" recommendations ever state a length of term. I've seen some reports which tend to advise when to sell assets. This is probably more useful information, but all the press goes toward hot stock picks. It's as if no one knows enough to buy but everyone is somehow an expert at knowing when to cash in their chips.

I suspect, as you do, that such an analysis of past performance would put some real egg on the face of the prognosticators. The only problem is that they never say when you should sell so you can't make a hard determination of the track record.

[Hawkmoon Nine]

Re #4.

I get SmartMoney, and just a couple of days ago the "What Stocks to Own for 2007" issue came. They did a review of the last few years of their buy lists.

[FMF]

I saw that (and will be posting on it later.)

If you notice, they have other recommended stocks and funds all throughout that issue, but their article concentrated only on a certain series of articles. Seems a bit fishy to me.

[Dale]

I do listen to some of those recommendations in the financial media from time to time, but in a very different way. I assume that by the time I notice them, the profits have been priced out of them for me. Okay, that doesn't mean that the recommendations were good or bad. But I read the reasons behind the recommendations. It's about learning. I ignore financial gurus who can't explain which something is a good investment opportunity or who spout gibberish.

[Ciji]

It takes time, but a savvy reader can differentiate between genuine advice backed by real numbers and a advertisement disguised as an article. One big clue: the actual advertisement is usually next to in with a few pages of the 'article'.