The Study That Makes Most Financial News Irrelevant

There's lots of investing experts, and most of them are wrong.

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Daniel Solin
Daniel Solin

It seems perfectly normal for investors to rely on "investment professionals" for advice during these troubled times. It's only logical to assume the views of these "experts" are valuable.

In response to this demand, the "experts" are out in force. A recent article from Reuters is illustrative. The author of article, Lauren Young, "canvassed more than 20 money managers, strategists and financial advisers about the probability of a default." Collectively, they manage hundreds of billions of dollars. Their advice covered a wide range. Some suggested betting against bonds by investing in inverse exchange-traded funds. Others recommended ultra-short-term bond funds and buying gold.

Here's the problem: These "experts" have no expertise. Acting on their advice is no more reliable than what you would expect from random chance. According to an article by Charles D. Ellis, published in the Financial Analysts Journal, research on the performance of institutional portfolios (presumably run by the best and brightest "investment professionals") shows that less than 1 percent achieved superior results after costs. The balance either underperformed their market benchmark or roughly matched it.

Think about the significance of this research. Almost all of the most sophisticated fund managers in the U.S. are incapable of adding value to their portfolios after costs. Why is their advice to investors about what to do in times of crisis of any value?

As Ellis properly notes, investment managers, investment consultants, fund executives and investment committees refuse to recognize the undeniable fact that they are engaged in a collective effort that has historically yielded "zero alpha." Ellis concludes that, until they do, "the crime of underperformance will continue to be committed."

The stock market edged lower early Tuesday even though Republican and Democratic leaders in the Senate reported that a deal regarding the nation's borrowing limit appears to be getting closer.

(Richard Drew/AP Photo)

The ramification of this study for individual investors is profound. The daily grist of much of the financial media is a steady stream of self-styled "experts" dispensing their wisdom about the future of the markets. Presumably, if they had this expertise, it would be reflected in the returns of the portfolios they manage. Because the evidence is to the contrary, why should you pay any attention to their musings?

The reality is that active managers and the financial media have a common economic goal. The fund managers want to increase assets under management. They use the financial media to tout their wares. The financial media enjoy a steady stream of advertising revenues from the securities industry. It has a vested interest in publicizing the "expertise" of the fund managers who are part of that industry.

Investors, as usual, are left holding the bag. Few have the ability to recognize that the glib "experts" dispensing lofty-sounding opinions about the future of the markets are really emperors with no clothes. A cynic could easily conclude this entire charade is nothing less than a well-crafted plan to separate hardworking Americans from their assets.

I am a cynic.

Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth advisor with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His next book, The Smartest Sales Book You'll Ever Read, will be published March 3, 2014.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.