Wise Money Decisions

This Investors Business Daily article entitled “Too Much Diversification Can Hurt You” is a good example of the kind of “throw away article” that the mainstream financial media churns out on a daily basis. 

The premise is that too much diversification can hurt you because you might pick a bunch of bad stocks.  The article gives this helpful little bit of advice:

“Research shows it’s better to own several high-quality stocks than dozens of stocks.”

Now there’s some enlightenment I can take to the bank!

For some unknown reason the article doesn’t quite come out and say it, but the implied reasoning is that you will pick bad stocks if you “diversify” and you will pick good stocks if you don’t “diversify.” 

That’s an assumption that is silly at best and harmful at worst. If you are able to pick good stocks, then you should be able to pick them whether you “diversify” or not.  Picking good stocks and diversifying are not mutually exclusive.

There may be something redeeming further down in the article. I don’t know.  I didn’t make it that far.

I find it comical that these short, silly little articles do away with decades of research into the benefits of diversification with a simple swat of their proverbial hand.

So why do these silly/harmful articles get written?  I’ll give you some options:

A) To share helpful knowledge

B) To teach people how to make money in the stock market

C) Because a journalist has a deadline and has to come up with something or he’ll lose his job

If you don’t know the answer, follow the advice I got from a friend as I walked in to take the ACT many years ago:  “Always guess C.”

J.D. at Get Rich Slowly wrote about why investors are better off to ignore financial news.  He cites a Harvard study that says:

Investors who received no news performed better than those who received a constant stream of information, good or bad. In fact, among investors who were trading [a volatile stock], those who remained in the dark earned more than twice as much money as those whose trades were influenced by the media.

He concludes that:

The daily fluctuations of the stock market are especially meaningless to me. I’m still learning the basics of saving and investing. I get more from reading the words of Warren Buffett or devouring books like The Four Pillars of Investing than I do from watching talking heads speculate on why Apple’s stock price fell. 

Here’s my spin:

Like any good business, the financial press has one overarching goal:  earn money. 

They earn money by getting you to read their magazine, watch their show, or visit their website.  With few exceptions, they aren’t concerned whether their product makes you a better investor.  Making you a better investor isn’t their primary goal.  Making you a better investor doesn’t help them earn money.

The financial press is composed of journalists and entertainers, not investors.  Those that are investors are compensated with money or brand enhancement to appear on the show or write the column.  They’re not doing it out of the goodness of their heart. 

I’m not saying they’re dishonest.  And I’m not saying they’re incompetent.  Not all of them.  But you should understand where they’re coming from.  They say things because they’re paid to say things, not because they have important things to say.

Let’s use Jim Cramer as an example.  He makes a tremendous amount of money doing what he does.  And what does he do?  He’s not really an investor.  He’s an entertainer.  He was an investor earlier in his life.  But now he’s an entertainer. 

Does that mean you shouldn’t trust his advice?  Just because he’s an entertainer?  Let’s put it this way.  I only have so much time in my life to absorb financial information.  I’d rather spend it reading books and articles with good, solid investing analysis.  I don’t want investing advice from someone who comes up with things to say only because he’s got a half hour to fill every night.

There are many well-meaning journalists that produce good advice.  But there is also a lot of bad advice out there.  Learn to know the difference so you can ignore the latter.