The Financial Media's Role in Clobbering Your Nest Egg

The financial media plays a huge role in influencing decisions made by investors. All too often, it misuses this power. As a consequence, the nest eggs of investors continue to dwindle, while the securities industry prospers.

I'm not talking about the usual culprits like Jim Cramer's aptly titled Mad Money and the daily fare on CNBC. These shows foster the false belief there are financial gurus who can make sense of the markets, or help you pick stocks or mutual funds. The underlying theme is that watching reports from the floor of the New York Stock Exchange is somehow helpful to investors.

The reality was nicely expressed by William Bernstein in his excellent book, The Four Pillars of Investing: "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."

Sometimes Dubious Advice

With this background in mind, I was eager to read a column on a fine financial site, Investopedia.com, titled 5 Investing Statements That Make You Sound Stupid, by Amy Fontinelle. At last, sound advice for investors.

Not exactly. While some of the examples are sound (like only investing a small portion of your assets in speculative stocks, assuming you must gamble at all), others are not.

Ms. Fontinelle counsels investors to "get great deals on stocks now since the market is tanking." Trying to time the market means taking a huge risk. In addition, there is no reason to buy individual stocks at any price. The expected return is about the same as the index to which it belongs, but the risk is far higher due to company-specific risk. Investors are better off buying the index.

Ms. Fontinelle counsels investors to hire a fee-only financial planner, which is good advice as far as it goes. Many fee-only planners recommend investments in individual stocks or in actively managed mutual funds. Hiring these advisers far from insures that your "net worth will increase." In fact, your portfolio is likely to underperform the market. Investors should be sure their fee-only financial adviser focuses on their asset allocation and limits investment recommendations to a globally diversified portfolio of low-cost stock and high-quality bond index funds, passively managed funds or exchange-traded funds.

Index Funds Not Enough Diversity?

Finally, I agree that holding the S&P 500 doesn't make your portfolio diversified. But it's not very helpful to tell investors that "that's just one component of my portfolio." A globally diversified stock portfolio should consist of an index fund that tracks the MSCI U.S. Broad Market Index -- like the Vanguard Total Stock Market Index Fund (VTSMX) -- and another index fund that tracks the Total International Composite Index, like the Vanguard Total International Stock Index Fund (VGTSX). Approximately 70% of your stock portfolio should be allocated to the domestic fund and 30% to the international one.

It's both unfortunate and counterintuitive that smart investing means ignoring most of the financial media. Their interest is in ratings and advertising revenue. They need to keep you reading, watching and listening. They do so by hiring outsize personalities ("boo ya") and by appealing to fear and greed ("buy gold now!").

Smart investors understand that sound investing principles don't change with the daily gyrations of the markets.

It's ironic that investors could treble the historical returns of the average equity investor by following the basic principles in my book, The Smartest Investment Book You'll Ever Read, and in The Little Book of Common Sense Investing, by John Bogle. These are books (along with many others) the securities industry and the financial media don't want you to read because they expose the system for what it really is: A way to separate investors from their money.

There's a better way. It's your responsibility to find it and to take control of your finances.