When it comes to investing, it’s hard to know who to follow these days. Since September 2009, the Vanguard Total Stock Market index fund (VTSMX) is up 33.4 percent. The Dow is approaching 12,900, reaching a post-crash high while so much of the debt crisis remains unresolved in Europe as well as here at home. China’s economy is slowing, and signs of inflation may speak of an overheating for emerging markets. And then there are the prognosticators calling for calamity.
Recently, Stansberry & Associates Investment Research released an alarmist video that quickly went viral. In it, Stansberry predicts the eminent demise of the global economy and the collapse of the U.S. dollar. Following an entertaining diatribe, Mr. Stansberry invites listeners to purchase from him, in U.S. dollars or course, his four investment secrets that can save investors from the coming calamity. Could he be right? And there are other gurus out there as well–each equally convincing.
Take, for instance, renowned author, speaker, and sage John Mauldin. Mauldin, the editor of the leading financial newsletter Thoughts from the Frontline, shares many of Stansberry’s ideas, but his prognostications point to a different set of equally terrifying timings and outcomes. Mauldin appears to have excellent credibility. Maybe his advice should be preferred over Stansberry’s?
Just when you’re about to pull up you financial tent stakes and run for cover, you come across equally revered financial experts like Pimco’s Bill Gross, who now likes the future of equities. Just think of that: Bill Gross, the bond king, bullish on equities? What next? To further obfuscate the process of finding your way in these dark financial days, with each vicissitude of the market new experts run into the spotlight, celebrating their accurate and recent predictions while throwing their hat into the competitive and rewarding guru market.
What is an investor to do? Who should he follow?
First lesson: Nobody knows nothing
“Nobody knows nothing” is a statement made by screenwriter William Goldman pointing out that even after 100 years of film making, Hollywood still doesn’t exactly know how to make a successful movie. Sometimes sure things bomb. Sometimes long shots win big.
Likewise, for decades top economists have been carefully studying ways to predict the movement of the public markets. Their conclusion: It can’t be done. Each day Harvard graduates, CFAs, MBAs, and beyond, armed with the most sophisticated, cutting-edge, super-computing technologies, stand ready at their terminals to exploit with a mere key stroke any unperceived market inefficiency. And even with these IQ points and tools at hand, many of these professionals still can’t find a way to consistently make a profit predicting the market.
A great illustration of this fact can be found in this week’s announcement by Merriman, Inc., that market timing does not work. In 1983, Merriman launched, portraying itself as a market-timing specialist. After nearly 30 years of managing $1.5 billion using this approach, Jeff Merriman-Cohen conceded that it doesn’t work. The firm has wisely shifted from active management to indexing strategies over the past decade.
Prophets in search of profit
One clear indictment of stock market prognosticators is their tendency to turn their predictions into for-profit media companies. It is amusing how experts claiming laser-sharp market insight still feel compelled to hang a shingle selling their wisdom to those lost in the fog of financial confusion. Wouldn’t one think that such enlightened money managers would do better focusing their insights on trading strategies rather than selling books or newsletter subscriptions? What would you do if you knew where the market was headed, write a book or place some trades?
Asset classes move randomly
The MSCI Emerging Markets Index is an excellent example of just how hard it is to jump on a trend. In 2007, emerging markets returned a whopping 38.8 percent. Many, impressed by this robust growth, rushed into VWO and other emerging markets ETFs. However, in 2008 emerging markets lost a miserable 53.2 percent. For many investors, the pain was just too high and it was time to run for the door. In a macabre twist, however, 2009 and 2010 would witness the roaring return of the MSCI index, which grew a shocking 98.2 percent over two years. And finally, to top off this unbelievable journey, emerging markets plummeted 18.7 percent to take the lowly place of ignominy in 2011.
With no reliable method of predicting what 2012 will bring, smart investors ignore the prognosticators and allocate their retirement dollars across all asset classes with predetermined and disciplined strategies. While others may prefer to send their subscription dollars to the economic prophets, smarter investors will deposit their money in their own accounts–for their own profit.