Naked Truth Investing: The prediction scam

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This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Want to make a lot of money in a down market? Write a book predicting a financial meltdown.

It worked for Howard Ruff. He racked up huge sales with his book, How to Prosper During the coming Bad Years, written in 1979.Ditto for Ravi Batra. He wrote The Great Depression of 1990. It was a best seller when it was written in 1987.

Remember all those books that told you how to make a fortune in real estate? It was so simple. You didn't even need a down payment.

Now that times are tough, there seem to be no end of books advising investors how to prosper when the "inevitable" financial meltdown hits.

Investors are told to liquidate their U.S. stocks. To invest in precious metals. To buy foreign stocks only on foreign stock exchanges and to hedge against the declining dollar. Maybe they are right and maybe they are wrong. I don't know.

But that is precisely the point. They don't know either, but they make a great living by pretending that they do.

One seminal study found that the predictions of economists about the future of the economy were worthless. You would think that their training would give them some meaningful insights about "turning points" in the economy. There is no data indicating that this is the case.

So what should investors do in these troubled times?

They should not rely on the predictive powers of self-styled "experts" who are no more than financial astrologers.

Instead, they should determine an asset allocation appropriate for them and implement that allocation with a globally diversified portfolio of low cost index funds,passively managed funds or Exchange Traded Funds.

Here is my prediction:

Based on historical data, investors who follow this advice will be in the top 5% of all professionally managed money over the long term.

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com.
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