As investment advisors, as well as ones who have extensively researched investment-related topics over the past thirty years, we have come to a disappointing conclusion: the ideas embraced and promoted by many in the investment industry and the media are not shared by the facts that are revealed in the academic world.
The next few blog posts will be dedicated to debunking the investment fallacies of our day such as market timing, superior investment selection, the persistence of performance, and avoiding equities by exposing where academic research and conventional wisdom collide. After all, we really can’t proceed with a constructive discussion about the management of investments during retirement without first dispatching false investment narratives.
So, why is there a chasm between academia and the messages shared by the conventional investment pundits of the day? The simple answer is that for some, profits trump giving quality investment information.
It is also important to remember that financial institutions were created to make profits for themselves and their shareholders, not their customers. These entities as well as the financial media are in the business of selling products and making profits. Giving useful, common-sense, factual investment advice is not their primary objective – selling a product and making money is.
Unfortunately, the tried-and-true facts resulting from academic research are valuable but usually boring. Fictional concepts, no matter how useless and sometimes damaging they may be, certainly have more sizzle, and sizzle sells products. The financial media, whether it is newspapers, magazines, radio or television, must “sell” you the news instead of giving you the facts. The financial news outlets would go out of business if they headlined the simple truths of investing such as “Patience and Discipline, the Keys to Success,” or “Slow and Steady Wins the Race.” To survive, they must continually come up with new and exciting headlines to grab your attention with headlines like, “Six Hot Funds to Buy Now!” or “Wall Street’s Secrets Revealed!” These headlines are catchy, and surely generate a lot of money for their companies, but this type of information does not help the investor.
We don’t begrudge corporations trying to make a profit in the most capitalistic industry on earth. Certainly, there are reputable financial companies that have valuable products and services we can benefit from.
Unfortunately, some companies and individuals fill the airways and printed media with half-truths and even outright lies as they attempt to get us to purchase their products and services. Just as pornography is harmful to all that get caught in its snare, this financial pornography likewise has no redeeming value, gives the investor a false sense of reality, and will devastate the financial future of any that allow themselves to be seduced by it.
As we were searching for a name to call these investment falsehoods, a song that that is often played on our classic rock radio station came to mind. The lyrics to the old Styx hit, “Grand Illusion,” accurately describes the deceptions of our day. So, welcome to the grand illusions of investing.
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Grand Illusion #1: Market Timing
Grand Illusion #2: Superior Investment Selection
Grand Illusion #3: The Persistence of Performance
Grand Illusion #4: Equities are too Risky and Should be Avoided
