Jim'sMoneyBlog

Financial Opinion and Insights

Investment “Noise” is Everywhere

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

Turn on the financial channels and everyone has advice for you.  Even AARP and Consumer Reports are providing ‘financial advice’ to you – never mind they don’t know you or your family, your income, your tax status, or goals, let alone your current or future obligations.

I just received my Consumer Reports “Bottom Line” Winter 2011 Special Edition – the bottom of page 1 says, “BOTTOM LINE Makes You Healtherier, Wealther, Wiser… Happier, Too.”  I wonder what the regulators would say if I made than claim in my newsletters.

The issue I just received did contain an interesting cover article, “Warren Buffet Reveals What You Should do If You Lost Money in the Stock Market Crash.”  It does contain some good advice:  Recognize that markets always bounce back; bad news is an investor’s best friend; buy a great business and don’t listen to the market; Invest in what you understand; and diversify your investments.  Too bad the crash was two years ago.  There are also a couple of other pretty nice short articles in the issue; but most of the issue was dedicated to hyping a series of special reports with a series of benefit bullet points…. All filled with great FREE advice!

Today investors are bombarded with information overload – all masquerading as advice!   And, frankly, the investment community is part of the ‘conspiracy’ urging investors to make ‘easy’ decisions.

Despite the fact that numerous academic studies for decades have shown that allocation decisions are what truly drive investment performance, tv gurus, newsletters, the financial press, and even most investment providers all advance the proposition that success is driven at the investment level rather than the portfolio strategy level.   Let’s face it:  If the media had to talk about portfolio strategy, they’d run out of things to say pretty quickly.  The MTV formula – lots of noise and rapidly changing images – works well in our entertainment driven society and wearing suits while sitting in front of trading desks seems to lend it all amazing credibility.

Investors share some of the blame, too.  In a world where skill cannot protect them from bad outcomes, they cling to the worldview that skill drives results and that both market timing and superior security selection is not only possible, but it happens all the time.   That’s an easier path to follow than going through all the boring steps of financial and investment planning which require self-analysis and answering some difficult questions that must take place over several weeks before the first dollar is invested.  

Time?  Work?  That’s not what they say on television!   Investors seldom realize they actually have to make informed and difficult decisions concerning expected return, inflation, taxes, and expected volatility among investments, not to mention making correlation assumptions about the various asset classes.  They also have to project their needs forward in inflation adjusted after-tax dollars to be sure they don’t outlive their money.   And, there’s also personal responsibility for maintaining discipline as the plan is implemented and pursued.  It’s little wonder investors often prefer to embrace the worldview that stock-picking and market timing is their key and all they need to do is find the right manager. 

So, watching the financial channels for tips and reading newsletters for star-ratings to find the right fund manager is still what many investors do.  Unfortunately, they don’t appear to be the successful ones.

The world of successful investing is built around a sound planning process.  But remember, information isn’t advice – and it certainly isn’t education.   Education is required to process information and advice can be rendered when the person providing the advice is someone who knows your personal situation, has all the facts, and can use his or her education to guide you through the decision-making process.

Yes, YOU must make the decisions.  Your advisor is your guide who’s duty it is – or should be –  to keep you from making avoidable mistakes.  Yes, it takes time, work, analysis, and decision-making.  It’s not as much fun as following tips and selecting investments first – always a bad mistake – but, it is your route to success.

Jim

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com.