Truth #8 of 101: Information is Toxic

The nightly news, daily stock market television programs, and cable news focus on variability to get your attention. (Just turn on Fox, CBS, NBC, ABC and they are all vying for your eyes.) They bombard you with the equivalent of “noise,” short-run data, and statistics that are useless. Paying attention to the short-term market fluctuations and newspaper headlines will completely disintegrate your peace of mind and ultimately your portfolio.

No one said it’s bad to watch the news and keep your “thumb on the pulse” of what’s going on. I recommend that you don’t use their “news” to make your investing decisions. The media makes money off of information – and they package it so it’s exciting to watch.

Psychologist Paul Andreassen of Harvard studied the link between the news media and investing. Andreassen found that the group of investors that had access to the news earned less than half as much per share traded as the group that received no news. (Andreassen, Paul. 1990. “Judgmental Extrapolation and Market Overreaction: On the Use and Disuse of News.” Journal of Behavioral Decision Making 3: 153-174.)

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Here my predictions I posted on Finance30.com

Since everyone else is predicting, I mind as well throw my hat in the ring. My prediction is that investors will fundamentally change the way they invest in 2010. They’ll close their retail brokerage accounts because they can’t stand all the predictions (most of them turn out wrong anyway). They’ll understand that they can control only a few things: They can keep their fees low by choosing the right funds; they can focus on their asset allocation; and they can use low-cost institutional funds to put together a globally diversified portfolio of stocks and bonds (unfortunately, this is what most investors don’t do). These 2010 investors are likely to achieve superior returns over the long term if they just follow the rules, not the predictions.

Truth #7 of 101: Technology makes investing more difficult, complex, and confusing – not simpler

If you run the word “stocks” on your favorite search engine (such as Google), you will find over 102 million pages containing the word. The sheer volume of statistics, facts, and data makes the process of investing infinitely complex and confusing. This data is changing every minute of every hour, all day, every day. Investing is more chaotic than ever.

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Most brokers and advisers are “active managers” who recommend portfolios of stocks, or actively managed mutual funds, they believe will “beat the markets.” When they recommend actively managed mutual funds, they often do so based on the Morningstar rating of the fund (“This fund gets 5 stars from Morningstar!”) or the past performance of the fund manager. Sound familiar?

According to an article by Larry Swedroe, “…active investors transfer about $80 billion annually from their own wallets to the purveyors of actively managed products and market makers.”

Click HERE for the article

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