Popular perceptions about how to succeed in the stock market do not mirror the more boring reality. And faulty perceptions, plus inflated expectations, can cost you a lot of money. Jimmy Atkinson shows some of the disconnects between beliefs and reality which can get you into trouble. He also provides a great list of worthwhile reading at the end. (Of course add Phil's Stock World!)
The Sad State of the Financial Web
By Jimmy Atkinson, Fund Reference
While buy-and-hold investors nearly always come out on top of active traders, you wouldn't know it from searching the Web.
Long-term investing can be very simple with the proper discipline and asset allocation in low-cost investment vehicles. The market isn’t a rigged game that investors have to maneuver through like a field of land mines. Perhaps the only problem with long-term buy-and-hold investing is that it’s boring. And while there are quite a few websites that devote a lot of attention to the values of low-cost buy-and-hold investing for the long run, there’s a lot of noise about active trading, timing the market, buying hot stocks, and speculating in gold to wade through.
Below are 10 sets of financial terms that illustrate some of the unfortunate disparities that appear in search results generated by Google and search interest of Google users.
Prudent Investing vs. Trading the Market
Buy-and-hold investing almost always beats active trading. Despite this, there are many more results for how to time the market than how to buy and hold stocks.
Like market timing, day trading is an expensive and risky endeavor that typically results in unnecessarily high commission costs and potential tax implications as a result of frequent portfolio churn, not to mention lower net returns than low-cost buy-and-hold investing. Value investing is the wiser approach.
Cheapest vs. Best Performing
Who wouldn’t want to own the best performing ETF? The problem is that past performance doesn’t guarantee future results. Buying into low-cost investment vehicles is typically a sounder strategy than chasing performance.
Budgeting vs. Taking out a Loan
Making a household budget and sticking to it is one of the cornerstones of personal finance. Unfortunately, it requires common sense and forethought, both of which can be hard to come by for most individuals. When financial distress strikes, many who would have been better off had they created a financial plan are quick to pull out a home equity loan. While search interest in home equity loans peaked in the run-up to the crisis of 2007-2008 and is on the decline since then, there is sadly still much more search interest in this than in budgeting.
Source: Google Trends
There has been increased search interest in payday loans over the past decade, while interest in savings plans have steadily declined over the same period.
Source: Google Trends
Investing vs. Speculating
Investing in a well diversified basket of low-cost index mutual funds and ETFs is a sound long-term investment philosophy embraced by Bogleheads. But there are many more search results for more speculative endeavors. There are nearly 20 times as many results for “invest in twitter” as there are for “invest in index funds,” despite Twitter trading at an extremely high valuation.
Understanding asset allocation is key to investing success. Unfortunately, it’s a pretty boring topic, especially compared to a discussion of the hottest stocks on the market today.
Free stock picks are an active trader’s dream. Yet those who invest in plain vanilla index funds are likely to have better net returns in the long run than someone who buys stocks based on free advice.
Saving for College vs. Buying Gold
Saving for college in a tax-advantaged investment vehicle such as a 529 plan is wiser than speculating in gold. Yet, search interest in buying gold has risen over the last decade, while interest in 529 plans has fallen.
Source: Google Trends
Dividend Stocks vs. Penny Stocks
Getting in on the ground floor of a penny stock can make you rich, but it’s more likely to cause you to lose money. Penny stocks are highly speculative and risky. Dividend stocks on the other hand — particularly blue chip dividend stocks — may not be as exciting, but they can offer steady, reliable income with a lot less volatility.
Cures for the Common Web
Thankfully there are a number of sites dedicated to conveying investment advice that is actually worthwhile. The exceptional sites listed below can serve as resources for those looking to invest wisely and gradually accumulate wealth.
- Big Picture: Barry Ritholtz remains one of the most insightful and honest financial commentators out there (as well as a tremendous source of morning reading).
- Bogleheads Forum: This free community of Bogleheads contains a massive amount of information on every topic imaginable, and is a great place to start for anyone looking to develop a greater understanding of investing.
- Coffeehouse Investor: This site is run by fee-only advisor Bill Schultheis, who is guided by the ideathat investors are best off when they do a little bit of planning and a lot of enjoying and experiencing life.
- Crossing Wall Street: Named the “best buy-and-hold blogger” by CNN Money, Eddy Elfenbein is a great source for both daily reading and long-term investing insight.
- Dividend Mantra: Jason Fieber, a passionate investor and “frugalist,” writes about his journey to financial independence through consistent savings and smart investing. In addition to updates on his portfolio, Jason shares detailed information about his monthly budgets and savings rate.
- Investor’s Field Guide: Patrick O’Shaughnessy is a portfolio manager who has written extensively about investor behavior and authored a book on investing strategies for today’s younger generations.
- Jason Zweig: The longtime personal finance columnist (currently at The Wall Street Journal) is one of the more thoughtful writers working for a major media outlet. Jason’s personal site is home to anoutstanding collection of his best pieces.
- Larry Swedroe: The director of research for the BAM Alliance is one of the most intelligent voices in the financial industry, who distills complex studies and research projects into actionable advice for all types of investors.
- Meb Faber: Meb is the CIO of Cambria Investment Management and the author of several books on investing. His site features book excerpts (he’ll also send you a free copy), research summaries, andgeneral thoughts on investing best practices.
- Oblivious Investor: Mike Piper is a CPA and author of several books, with a gift for illustrating just how simple investing should be. His Investing 101 summary is a great starting point for those with little experience.
- Reformed Broker: Josh Brown is the CEO of Ritholtz Wealth Management, on-air contributor to CNBC’s “The Halftime Report,” and author of a couple of books. His reputation for providing honest insights about the wealth management industry has made him one of the most widely followed voices in the business.
- Rick Ferri: Rick is the founder of Portfolio Solutions and author of several books. He is one of themost vocal proponents of low-cost indexing and general common sense investing.
- Wealth of Common Sense: Ben Carlson is an institutional money manager who excels at breaking down complex investing topics into concise, easy-to-understand discussions.
There are many other valuable resources out there as well; let us know your favorites in the comments below.
