I often read Personal Finance magazines because I know my clients do. In a big picture way they give solid advice about investing — not timing the market, setting up a long-term asset allocation, etc. At the same time many of their articles and columnists are advocating just the opposite. The January 2013 cover story for Kiplinger’s title story is “Where to Invest Now” quoting Katerine Nixon of Northern Trust saying “It’s going to be a pretty good year for stocks.” I have two issues with this cover. First, it implies that market timing can be a successful strategy even when research implies that for most people it isn’t. Second, what the heck does a “pretty good year for stocks mean?”
Opening the magazine we see that they feature a mutual fund manager in a red tie and socks (Cardinals Fan, were told — is that baseball or football?) who only holds about 20 stocks. Why don’t they feature the guy that bet on red at the casino and doubled his money in a few seconds. Arguably a much better result that this guy achieved. When a magazine features the mutual fund manager “winners” they imply that more than luck is involved in their winning ways, when in reality a long-term statistical analysis implies that it’s all luck.
There are two reasons why many people have a hard time buying this.
1. When it’s something we perceive as complicated and don’t fully understand how it works we give greater deference to those who seem to do well. Since we do not understand how the stock market really works those who do well are perceived to have have special skills. Such deference is usually not accorded to someone who flips heads 10 times in a row, a much rarer feat.
2. The mutual fund industry spends vast amounts of money to support this model. If you can make a lot of money convincing investors that you have a winning strategy for the long-term they will give you more money to invest. If you do well in the short-term you can tout your performance to gather more assets and fees. When you do poorly, blame it on the market or shut down that fund and start over again.
I understand that Kiplinger’s and the others have to sell magazines and web views but it would be great if they included a disclaimer by every article recommending individual stocks or actively managed mutual funds that “there is no empirical evidence that pursuing this strategy will be more effective than a buy/hold/re-balance asset allocation strategy using low-cost index funds.”