When it comes to investing, it’s hard to know who to follow these days. Since September of 2009 the Vanguard Total U.S. Stock Fund index (VTSMX), is up 33.4%. The DOW is approaching 12,900, reaching a post crash high while so much of the debt crisis remains unresolved in Europe as well as here at home. China’s economy is slowing while signs of inflation may speak of an overheating for emerging markets. And then there are the prognosticators calling for calamity.
Recently Stansberry Research released an alarmist video that quickly went viral. In it, Stansberry predicts the eminent demise of the global economy and the collapse of the U.S. dollar. Following an entertaining diatribe, Mr. Stansberry invites listeners to purchase from him, in U.S. dollars or course, his four investment secrets that can save investors from the coming calamity. Could he be right? And there are other gurus out there as well – each equally convincing.
Take, for instance, renowned author, speaker and sage, John Mauldin. Author to the nation’s leading financial newsletter, Thoughts From the Frontline, Mauldin shares many of Stansberry’s ideas, but his prognostications point to a different set of equally terrifying timings and outcomes. Mauldin appears to have excellent credibility. Maybe his advice should be preferred over Stansberry?
Just when your about to pull up you financial tent stakes and run for cover, you come across equally revered financial experts like Pimco’s, Bill Gross, who now likes the future of equities. Just think of that – Bill Gross, the bond king, bullish on equities? What next? To further obfuscate the process of finding your way in these dark financial days, with each vicissitude of the market a new batch of experts run into the spotlight celebrating their accurate and recent predictions while throwing their hat into the competitive and rewarding guru market.
What is an investor to do? Who should he follow?
First Lesson – Nobody Knows Nothing
“Nobody knows nothing” is a statement made by screenwriter William Goldman pointing out that even after 100 years of film making, Hollywood still doesn’t exactly know how to make a successful movie. Sometimes sure things bomb. Sometimes long shots win big.
Likewise, for decades top economists and scientists have been carefully studying ways to predict the movement of the public markets. Their conclusion – it can’t be done. Each day a veritable horde of Harvard graduates, CFAs, MBAs and beyond, armed with the most sophisticated, bleeding edge, super computing technologies, stand ready at their terminals to exploit with a mere key stroke any unperceived market inefficiency. And even with these IQ points and tools at hand, many of these professionals still can’t find a way to consistently make a profit predicting the market.
A great illustration of this fact can be found in this week’s announcement by Marriman Inc. that market timing does not work. In 1983 Marriman launched their firm as a market-timing specialist – experts with the ability to peek around the corner and see which asset classes to favor and which to sell. After nearly thirty years of managing $1.5b using this approach, Jeff Meriman-Cohen, founder and reformed market-timer, states, “trying to time when to get into and out of stocks erodes investor’s long-term returns.” Their firm has wisely shifted from active management to indexing strategies over the past decade.
And its not just Marriman that can’t get it right. Famous prognosticator, Harry Dent, has launched two funds in his own name. The first, AIM Dent Demographics Trends Fund, was launched in 1999. Sadly, the fund performed dismally loosing 11% a year from 2000 to 2004 underperforming the S&P 500 by 9% annually. But Dent didn’t let this put a dent in his vision. In September of 2009 he launched his second fund, Dent Tactical ETF (DENT). Since its inception the fund is down 6.7% while the Vanguard Total U.S. Stock Fund (VTSMX) is up 33.4%.
Prophets in Search of Profit
One clear indictment of stock market prognosticators is their tendency to turn their predictions into for-profit media companies. It is amusing how experts claiming laser sharp market insight still feel compelled to hang a shingle selling their wisdom to those lost in the fog of financial confusion. Wouldn’t one think that such enlightened money managers would do better focusing their insights on trading strategies than selling books or newsletter subscriptions? What would you do if you knew where the market was headed, write a book or place some trades?
Asset Classes Move Randomly
If you take a look at the chart provided, you will see how seven major asset classes have performed over the past five years. The MSCI Emerging Market Index is an excellent example of just how hard it is to jump on a trend. In 2007 emerging markets returned a whopping 38.8%. Many, impressed by this robust growth, rushed into VWO and other emerging market ETFs. Strangely, in 2008, emerging markets becoming the worst performing asset class, losing a miserable 53.2%. For many investors the pain was just to high and it was time to run for the door. In a macabre twist, however, 2009 and 2010 would witness the roaring return of the MSCI index, growing a shocking 98.2% over two years. And finally, to top off this unbelievable journey, emerging markets once again plummeted a negative 18.7% to take the lowly place of ignominy in 2011.
With no reliable method of predicting what 2012 will bring, smart investors ignore the prognosticators and allocate their retirement dollars across all asset classes with predetermined and disciplined strategy. While others may prefer to send their subscription dollars to the economic prophets, smarter investors will deposit their money in their own accounts – for their own profit.