Market Sell-Off Causes Jim Cramer to Give Worst Advice Ever

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Jim Cramer and I are natural adversaries, like the polecat and the duck. (In this analogy, I'm the duck.) He gives false hope to investors by providing "advice" that often only causes harm. It's rarely backed up by sound data. I, by contrast, try to empower investors by demystifying the world of investing. I attempt to show investors they're likely to outperform most professional money managers simply by buying index funds and ignoring most of the financial media. I rely on sound, credible data, which I refer to frequently in my books and blogs.

My Perspective

In 2006, I wrote the first of my "Smartest" series of investing books, "The Smartest Investing Book You'll Ever Read." In it, I argue that investors should first determine their asset allocation and then consider buying three index funds directly from Vanguard: the Total Stock Market Index Fund (VTSMX), the Total International Stock Index Fund (VGTSX) and the Total Bond Index Fund (VBMFX). I advised rebalancing once or twice a year to keep your portfolio in line with your risk profile. That's it.

My suggestions involve no market timing, no stock picking, and no attempts to figure out who the next "hot" fund manager will be.

Cramer's "Advice"

On Sept. 25, 2014, the Dow Jones industrial average (^DJI) lost 264 points in a broad sell-off. This caused Cramer to go on an extraordinary anti-index fund rant. He advised his dwindling number of viewers that if they "put in the time" to determine when to enter and exit the market, their "rewards will be far greater than the average index fund." He believes "timing" is the key to making money in the market, and that he is the one to teach you how to do it.

As usual, Cramer provided no data (much less peer-reviewed research) to support his claim that he has successfully timed the market, or that anyone has this skill.

The Data on Market Timing

For those who might want real data on the subject, Mark Hulbert analyzed the track records of 103 market timing strategies over the past 10 years. He found that a whopping 80 percent of these market timing professionals failed over any reasonable period of time.

A study by CXO Advisory Group examined 6,582 forecasts for the U.S. stock market offered publicly from 2005 through 2012 by 68 "experts." The aggregate accuracy of these "gurus" was below 50 percent, meaning their predictions were a bit less effective than basing your investing strategy on the toss of a coin.

Significantly, Cramer's market timing accuracy was only 46.8 percent. Maybe he would have done better if he had "put in the time," but I doubt it.

Cramer doesn't publicly mention his dismal track record, nor does he discuss the other downsides of a market timing strategy, such as higher transaction costs and an increased tax liability.

What about managers of tactical asset allocation funds? You might think they would be experts in market timing, since the premise of these funds is that they are supposed to have the ability to dump stocks before the market crashes and buy them before they recover.

A study by Morningstar of 112 tactical funds from July 31, 2010, through Dec. 31, 2011, found "very few" of the funds studied delivered better risk-adjusted returns than Vanguard's Balanced Index Fund (VBINX), which passively invests its assets in a portfolio consisting of 60 percent stocks and 40 percent bonds. Most of the funds studied had lower returns than the Vanguard fund and "were more volatile and prone to downside or both."

Legitimate Financial Experts Don't Believe in Market Timing

It's sad that Cramer uses his bully pulpit to disseminate advice that has so much potential to harm investors. Highly respected financial experts are on record advising against market timing -- experts including Warren Buffett, Peter Lynch, Jason Zweig, Charles Ellis and Bernard Baruch.

The Economist surveyed the various measures used to time the market and concluded: "It is perhaps inevitable that there is no easy way to time the market; otherwise, it would have been discovered, exploited and eliminated before now."

Do you really believe Cramer has made this discovery when it has eluded so many others? His own record says otherwise.

Historical Results of Index-Based Investing

Cramer's recent eruption of index-fund bashing included the misleading argument that investing in those funds didn't protect investors during the market meltdown that started in 2008. At best, this is a half-truth. No one claims that indexing will protect investors in every market. In my books, and in books by others (Burton Malkiel, William Bernstein, Larry Swedroe, John Bogle), indexing proponents counsel investors to determine the right asset allocation ratio for their needs, and to buy and hold their investments for the long term. Investors with a time horizon shorter than five-years should have little or no exposure to stock market risk.

I asked Sean Kelly of Kelly & Associates to run the returns of my sample Vanguard portfolio, consisting of the three index funds noted above. He assumed an asset allocation of 60 percent stocks and 40 percent bonds, which is common although not suitable for everyone. He also assumed annual rebalancing. In order to avoid the claim that I was cherry picking times, I asked him to calculate returns over the following wide range of periods:

Period and Average Annual Return (Geometric)

1970-2013: 9.71 percent
1994-2013: 7.75 percent
2004-2013: 7.11 percent
2009-2013: 12.02 percent

Keep in mind that only 60 percent of the assets in these portfolios were exposed to stock market risk.

Ethical Issues

Especially in times of market volatility, investors are understandably anxious. Cramer has every right to his opinion. CNBC is in the ratings business and is largely supported by advertisers from the securities industry. Those advertisers benefit when investors move their money in and out the markets, generating transaction fees. Nevertheless, is it ethical to dispense "advice" that is contradicted by an overwhelming amount of academic data? If Cramer believes he has not only the ability to successfully time the market, but to teach his viewers how to do so as well, shouldn't we expect that he will provide credible support for these claims? Shouldn't he at least refer to the data indicating the high likelihood that those who attempt to time the market are likely to underperform the market?

What do you think?

Daniel Solin is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is "The Smartest Sales Book You'll Ever Read."

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Market Sell-Off Causes Jim Cramer to Give Worst Advice Ever

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