While paging through the latest issues of Forbes and Money, I noticed something amusing… Both magazines were chock full of advice on how to navigate the current economy with your finances intact. No surprise there. What surprised me was that the two publications were offering completely opposite advice.
Invest in bonds!
For their part, Forbes advised readers to “Dump Stock, Buy Bonds, ” arguing that history indicates that we should shun stocks in favor of corporate bonds.
Of course, this isn’t the first time we’ve heard this argument… In fact, I wrote earlier this week about the performance of stock vs. bonds when I highlighted Richard Arnott’s work showing that stocks can underperform bonds for significant periods of time.
Invest in stocks!
In contrast, Money sliced and diced the numbers differently and came to an entirely different conclusion. In fact, in an article entitled “Why Buy Stocks if Bonds are on Top?” author Paul Lim argued that:
“In all 880 rolling 10-year spans since the end of 1925… bonds [only beat stocks] 17% of the time.”
Moreover, lengthy periods during which bonds have outperformed stocks (such as we’re currently experiencing) have proved to be “great buying opportunities for … patient and value-minded [investors].”
The way forward
So which is it? Should you be focusing on your investments on stocks or bonds?
My advice is to ignore the noise. Develop an investment strategy, including a well-defined asset allocation plan, and then stick to it.
Remember… Magazines exist for one reason: to sell copies. Don’t look to them for detailed investing advice.
15 Responses to “Investment Advice: Ignore the Noise”
Concentrating on a few solid investment opportunities may be better than spreading a portfolio too thin. Thanks for the advice.
You’re best off making a long-term asset allocation plan based on your time line and your appetite for risk and sticking to it – no matter what magazine you pick up. The other key element to consider? fees. Look for low-cost investing options.
I tackled this same question in a post on my blog earlier in the week here: http://www.thevalueseeker.com/2009/07/are-stocks-cheap/
Basically, the answer, as Nickel kind of hints at, is all of the above. The important thing to realize about the stock market (or any market) — that was not so common knowledge only a year ago — is that it is not guaranteed to outperform anything, or to reach a set objective.
The key, as with any investment, is to buy it cheap. Some stocks are cheap right now, and so are some bonds — the same way it has been since both of those markets came into existence.
I have a feeling for most of the readers here, given a notable fiscally conservative bent, they would be much happier being heavy in the bond market than paying the risk premium for stocks. Don’t let anyone tell you that there is something wrong with that.
A lot of financial advisors and big names are now saying that stocks are a dead investment. I’m not going to back this opinion, but it’s something to think about. Most people are now saying to stash your cash (stowing cash in savings accounts with good interest rates).
Oops, mistake. It was a few months since I bought the munis, not a month ago.
Agree with the premise of this post – don’t listen to magazines. Read them, then decide for yourself.
BuffetFan- you still didn’t say what to do with the money in case if:
1. One already has a well paying job.
2. If one loves one’s job than this is the same as 1. If not then one cannot make money with one’s passion either for the lack of talent or lack of jobs. In this case 2. is really a hobby. Hobbies can bring money or not. If not – then it is not investment, it is entertainment. Important for quality of life but not as part of an investment strategy.
3. One doesn’t have any debts. Really, it annoys me how posters assume that everyone has debts. Besides, arbitrage has been around for years. Not paying off a low fixed interest debt can be part of an investment strategy. I happen to have bought some AAA municipal bonds paying tax free 5.5% a month ago. Now, my mortgage happens to be paid off, but paying off a mortgage where you pay tax deductible (if it is deductible for you) 4.75% while investing in AAA municipal bonds at tax free 5.5% seems like a valid investment strategy. Nope, no such rates now, but this was just an example of how under certain circumstances it may make sense not to pay the debt.
4. OK what to do with the rest of the money? You say putting some money into stocks and bonds. Great. Your strategy doesn’t say what to do with the rest of the money that are left after 1,2,3 and 4. CDs? Great and safe if you expect deflation, but not if you expect inflation. Ditto about government bonds except for TIPs. TIPS? Maybe – if you expect inflation and trust government numbers. But neither strategy is risk free.
Virtually every investment strategy has risks. The higher the risk the higher possible return. One needs to decide based on one’s risk tolerance, view of the economy and individual circumstances not based on what one reads or hears. Incidentally sometimes even what is generally considered a bad idea can work out for the best. E.g. I keep way too much money in my employer stock, but since my employer stock is higher today ($115) than it was at the end of 2007 ($109), I sure as hell happy that I haven’t moved money into index funds… . Yes, I plan to sell some, I agree it is a bad idea to keep too many eggs in one basket (not all I have but maybe 20%).
BTW – my losses in 401K were around 20%, and I have already got some of the money back. Not nice, but way better than some people. A friend of mine’s losses in 401K are 0 because he moved money into stable value on time. If people lost too much money, maybe they should’ve kept less money in stocks within 401k? Really, there is stable value in 401K, and some 401K plans have government inflation-protected bonds as well. Why do people equate 401K with stocks?
Here’s the best investment advice with best return:
1. Invest in a great paying job.
2. Invest in a job that you love.
3. Invest in paying of all debts, the rate of return is always without risk or lost and the investment expense is 0% (try to beat this with your index funds). Life without car or housing payment is very low stress and full of options. Remember what it was like when first left high school?
4. Gamble some of your money in stock and bonds. The expense is higher here and so is the risk. People selling you these products are more likely to make money then you. They also know when to sell and leave you with your losses. Do you know who took all the money in the recent stock market crash? Not the working people contributing to their 401k.
Think about number 4 for a little while.
Notice that the advice is almost exclusively in favor of stocks and bonds, or mutual funds centered on either? Now look at the ads, and you’ll know why they recommend stocks and bonds. It’s all about the advertisers, not about the readers. Those magazines may have some great information from time to time, but it’s generally ad driven advice.
How much do they recommend CD’s, government bonds, currencies, commodities? Not so much. So they advocate diversification–“well, given the strength of the market and the fundamentals driving it, you should be 80% in stocks, 20% in bonds” or “the economy looks shaky and there’s no telling where things are going, so a 70% stock/30 bond mix should bring you out on top”.
Where do these experts dissappear to when the market is tanking, and do the ever recommend getting out of stocks completely, demonstrating some level of objectivity? Never.
Read them for entertainment, but take the advice with a large grain of salt. They aren’t objective.
Just keep it simple. Everyone is going to give what they think is great advice but as long as you get started and begin to save, you are ahead of the game. Forget the jargon and keep it simple.
I agree with KC. I, too, enjoy reading financial magazines, catching CNBC and, obviously, scouting out different investing approaches on the internet. Does that mean I change my investment strategy every time I read a different article? Of course not!
I still enjoy finance magazines and watching CNBC. I don’t really listen to them unless they direct something at my particular style of investing. But I agree with you – ignore the noise. Develop an investing style and stick with it. I’ve done that, even through the recession and subsequent market plunge, and I’ve fared pretty well. Sure I’ve lost money overall, but not as much as I could have. I’m very optimistic about the future and especially my investing style. I’ve done quite well these past few months and its cause I’ve ignores the noise and stuck with what I know and understand.
The problem is that just about all investing advice today is marketing oriented. The idea that you should make a switch is marketing-oriented, that’s so. The idea that you should “ignore the noise” is also marketing-oriented. It’s just another brand of financial porn aimed at bringing in those investors whose marketing profile shows that they don’t fall for the alternative versions of financial porn.
We need to figure out investing for ourselves. We need to start a movement in the Personal Finance Blogosphere where we try to figure out what really works and report our findings to our reader. Out first commandment has to be: Marketing Considerations Will Not Influence Our Reports.
There’s no other way. So long as we permit marketing to be the dominant force in what we hear about investing, we are all going to continue to destroy ourselves financially.
Magazines exist to make a profit & not to deliver the best news to me? Huh… who’d-a-thunk-it
Good advice people, turn on your listening devices.
Your exactly right. Ignore anything that says “do this”. Look for information that explains the features and risks of any particular asset class. You then need to apply this to your own situation (age, investment period, attitude to risk etc.)
You stole my tagline! 😛
jk, of course. I wasn’t the first one to say it, nor will I be the last. It’s good advice though, methinks. 🙂