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.”

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Truth #6 of 101: The media loves to promote the wisdom and insights of managers with “hot hands” or the “Midas Touch.” They gleefully put them in advertisements and on magazine covers. These gurus are often featured one or two years later in derogatory articles about how their investing prowess has mysteriously disappeared. They die in the pages of the Wall Street Journal or Money magazine. Yet, investors want to keep thinking that picking “this” manager will be different for them. It’s not!

Mr. John Bogle, former Vanguard CEO said, “All the statistical data suggests that investors are wasting their time trying to pick active managers. Money manager Ted Aronson says that to be even 75 percent sure a manager is skillful, you’d have to track his performance for between 16 and 115 years. Let’s assume that an investor owns five actively managed funds over the portion of their investing lifetime—which might be 65 years for a twenty- year-old today. Yet on average, mutual fund managers last about five years. That means that an investor might have 65 managers over their investment lifetime. To truly believe that you’re going to pick 65 managers that will outperform the market defies credulity.”

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You Will Get Slaughtered!

Truth #5: If an investment strategy is on the cover of every magazine, and all of your friends and associates are doing it, it’s reckless to follow suit. Only hot, sexy, and speculative techniques make the cover. Magazines are primarily designed to “sell magazines” not give financial advise. Don’t follow your friends!

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