If you like to follow what the smart money is doing, you're probably hurting your returns.
“Financial porn,” or money advice that teases and titillates more than it informs, is ubiquitous these days, promising everything from safe returns with no risk to all-gain-no-pain paths to financial success. All of which would be harmless enough, except it can create false expectations and lead to poor financial decisions. Here are four signs that you may be at risk.
1. You’re a sucker for double-your-money schemes. With stock valuations on the gaseous side and many advisers forecasting well-below-average returns for the future, you might think that few investors would be receptive to the lure of doubling their money in a hurry. But you don’t have to look hard to find stories touting stocks in areas ranging from biotech to real estate that are supposedly capable of doing that in a year, or less. (One article even talks about doubling one’s money in five hours!) In the event you find this too extreme, not to worry: There’s a seemingly endless stream of articles on stocks, funds and ETFs that will merely beat the market.
Given the plethora of investments available, there will always be some that outpace the market or even double in value quickly. And you won’t have trouble finding them with the benefit of 20/20 hindsight. But the reality is that it’s nearly impossible to identify such top-performers consistently in advance. Besides, any investment with the potential for huge returns also comes with outsize risk. Rather than speculating on which stocks or funds might clobber their peers or shooting for unrealistic gains, you’re better off building a low-cost diversified portfolio of index funds or ETFs that reflects your risk tolerance. This approach might not deliver the thrill of seeing an occasional pick pay off handsomely. But you’ll avoid the inevitable (and more frequent) spills that occur when risky high-fliers flame out.
2. You like to follow the “smart money.” It seems like such a simple and effective route to financial success: Piggyback on the moves of the financial pros and market savants who supposedly know better than the rest of us. And a constant supply of stories purports to offer us insights into what financial savants are up to. But there are a couple of things you need to know about this oft-cited advice.
One is that it’s not always clear what the smart money is doing. Depending on which story you believe, the smart money has recently been buying precious metals or energy stocks or consumer discretionary shares or getting out of stocks altogether. Or maybe the smart money’s been making these moves serially or doing them all at the same time. Who knows? And really, who cares? Because the the second thing you need to know about the smart money is that it isn’t always so smart. In fact, “dumb” index funds beat the majority of “smart” money managers over the long-term. So don’t waste time and effort tracking the smart money (whoever the smart money is). Invest based on your financial needs. That’s the smart thing to do.
3. You’re a seeker of “secret” solutions. We all like the idea of getting a tip from an insider. Which is no doubt why there’s no shortage of stories that rope us in with the promise of letting us in on some secret, whether it’s the investing secrets only the pros know, the secrets to a successful retirement, the secret to financial success or (kudos for killing two birds with one stone) the secret to doubling your money.
But we all know that real secrets are rare in the financial world. Want a secure retirement? It’s no secret that the secret is getting an early start on saving and then saving diligently throughout your career. Investing? The open secret there is that it’s virtually impossible to consistently beat the market, so your best shot at investing success lies in creating a low-cost diversified portfolio and rebalancing periodically.
Which is why stories that claim to share secrets are almost always a tease. The secrets are usually things we already know, or ought to. That said, I don’t think the desire to unearth secrets is dangerous so much as a diversion that might distract you from focusing more on what’s really important in investing and planning. In the spirit of full disclosure, I should also add that I’m not above reproach when it comes to divulging putative secrets, witness the headline of this RealDealRetirement.com story: Is Sex The Secret To A Happy Retirement?
4. You love hearing about new and novel investments. Whether it’s skittishness about stocks and bonds in today’s market or a natural desire to want to spice things up, many investors are on the lookout for fresh, cutting-edge investment opportunities. And advisers, as well as personal finance journalists, are more than willing to cater to that desire by touting all manner of “alternative” investments. The choices range from what you might call the usual suspects—long-short and absolute-return funds, private equity, hedge funds, commodity funds, etc.—to more arcane offerings: tax-lien certificates, parking spots, equipment leases, peer-to-peer lending and fishing rights, to name a few.
But sprinkling a helping of such investments into your portfolio no more guarantees a well-diversified portfolio than helping yourself to every item on a smorgasbord assures a balanced diet. If anything, once you go beyond a healthy mix of U.S. stocks and bonds and perhaps a dollop of international shares, you run the risk of di-worse-ifying rather than diversifying. Besides, most investors are unable or unwilling to do the research necessary to make informed decisions about esoteric investments. Throw in the fact that fringe investments often come with lofty fees (often to pay the person peddling them), and your chances of doing better loading up with alternatives than you would be simply sticking to a plain-vanilla portfolio of low-cost index funds and ETFs are slim. Which is to say, just because investment firms regularly market sorts of new investments doesn’t mean you should fall for their pitch.
Financial porn has been around a long time, even well before Jane Bryant Quinn first coined the phrase “investment porn” in a Newsweek column back in 1995. And given the fertile ground of the internet, I expect it will continue to grow like kudzu in the years ahead. Read it, if you like; enjoy it, if you can. Just don’t rely on it for your planning and investing.
Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at email@example.com.
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