Get Out of the Stock Market Now, Part 2: Why Good Advice Is Hard to Swallow

My April 12 column on DailyFinance, "Three Reasons to Get Out of the Stock Market Now!"generated a spirited response -- to put it mildly.

Many readers misinterpreted my advice. It was aimed only at investors who persist in relying on active fund managers and brokers and advisers who tell them they can "beat the markets."

It is my view that all investors should invest in a globally diversified portfolio of low-cost stock and bond index funds in an asset allocation appropriate for them. For data supporting this view, I recommend the books of Burton Malkiel, John Bogle, Allan Roth, William Bernstein, Larry Swedroe and Mark Hebner, among many others.

I anticipate some readers will refer to Warren Buffett as an example of a revered and successful investor who disagrees with this advice. Here's what Buffett told investors in his 1996 Shareholder Letter: "... the best way to own common stocks is through index funds." He has repeated that advice in subsequent shareholder letters and in many interviews.

The problem is that most investors won't follow this advice, and it is those investors who would be better off in a low-cost bond index fund, based on the data referenced in my column.

Too Many Investors Fall for Market Myths and Misinformation

It is not surprising that investors don't follow basic, well-established principles of intelligent investing: They are inundated with huge amounts of misinformation by the securities industry and the financial media.

For example, most investors still believe there are investment "gurus" who can time the markets, pick stocks or pick outperforming mutual funds. Others persist in the view (for which there is absolutely no support) that "doing your own research" is the key to investment success.

Some are convinced that you should buy gold as a cushion against the disaster they see coming (with great confidence). Others are equally confident we are on the brink of a major recovery.

Many investors cling to the belief that buying dividend stocks and funds is the key to investing success. This simplistic concept ignores many misconceptions about dividends which can make reliance on them a disastrous investment decision.

What all these views have in common is the complete lack of data to support them. They might be right, but they could just as easily be wrong. That's precisely the point: No one knows.

But people hold tightly to these theories because it's hard to swallow the fact that investors are at the mercy of forces they can neither control nor predict.

Great Minds Agree: It's Exceedingly Difficult to "Beat the Markets"

In these difficult times, it would be wise to be guided by these principles:

1. While no data is predictive, long-term historical data is the most reliable information you can get. Be sure you are familiar with it;

2. Nobel Prize winners in economics, including Paul A. Samuelson, William F. Sharpe, Daniel Kahneman and Merton Miller believe it is exceedingly difficult to "beat the markets." It is possible, but unlikely, that you and your broker are smarter than these scholars, who have spent their entire lives studying the capital markets;

3. Market returns are superior returns. They are yours for the taking, but the average stock investor is only capturing a fraction of them. Don't be one of those investors.

4. Focus on your asset allocation and on low cost stock and bond index funds. We know what has a high correlation with superior returns: low costs.

5. Understand the level of risk in your portfolio.

If you hear contrary advice from brokers, advisers and other investors, ask them for the data that supports it.

William Bernstein, the author of The Four Pillars of Investing and other excellent investment books, summed it up the best:

"Turn on CNBC at 9:31 A.M. any weekday morning and you're faced with a lunatic asylum narrated by the Three Stooges. But stand back a bit and things become much calmer and ordered. When the market is viewed over decades, its behavior is as predictable as a Lakers-Clippers game. The one thing that stands out above all else is the relationship between return and risk. Assets with higher returns invariably carry with them stomach-churning risk, and safe assets almost always have lower returns."

Every investor should heed his wise counsel.