Many investors make bad decisions because they receive bad information. The industry is cluttered with investment misinformation, incomplete information and information that is not impartial. The financial industry is not the victim of this avalanche of misinformation. It is the creator, distributor and beneficiary of it.
We’ve discovered 4 main types of misinformation in charts, graphs, and papers:
Messages telling us everything will be ok
Charts and graphs that are missing information
Information not supported by real world data
Information that creates a flawed investment portfolio structure
The financial advisor is therefore often the victim, not the problem.
The Genesis of Investment Misinformation
The Great Depression was the most cataclysmic economic disaster in American history, and it did more than just rob 89 percent of the stock market’s value. It changed the way people thought about money. The Depression eviscerated trust in financial institutions like banks and investment houses. In the wake of the Depression, many people physically squirrelled away money instead of investing or even putting it in banks.
To try to convince people to trust financial institutions with their money again, the financial industry began distributing information about the positive potential of investing and how buying into companies can grow money over time. This became more than a cottage industry when investing gained popularity in households with the advent of the 401k in 1978.
The great depression recovered 25 years later in 1954 and people did begin investing again. The more information the industry put out, the more people invested. Companies emerged dedicated solely to disseminating financial information.
Since some of the people putting out the information directly benefitted from people believing in it, they began accentuating the good and minimizing or omitting the bad. It was the glossiest, prettiest argument for investing—one that made it sound appealing, attractive, simple and easy to do, that made its way to investors by way of advisors and their firms. It came in the form of indexes, newspapers, investment companies, books, research firms and news outlets.
This is the clutter that investors must wade through today, a world littered with often self-serving misinformation.
Investment Misinformation Creates Misinformation Risk™
Bad information can encourage investors to act against their own interests and pursue investments that benefit the people who sell them. Misinformation surrounding buy-and-hold mythology convinces some investors to stay in, even when it is clearly in their best interest to get out and potentially avoid massive dollar losses.
If the clutter were completely swept away and the financial industry simply told investors the truth, would they still invest?
It’s likely, yes, but they would likely make radically different decisions, only a few of which would benefit the people who package, sell and manage investments 100% of the time like most of those decisions do now.
It might be hard to believe that there are those in the industry that disseminate information that intentionally omit material facts, but it sneaks through all the time. In our opinion, buy and hold only and forever is based on this clutter of bad information.
There have been horrible 20-year periods, and the people who retired during those periods suffered devastating results with respect to their wealth and standard of living. During the latest crash in 2008, some investors lost ½ or more of 30 to 40 years worth of work and savings in two to four years.
With a tactical, buy-and-sell strategy, those same investors could have anticipated the problem and potentially moved their money to safety before the crash arrived—and they might have if they hadn’t been receiving so much misinformation for so long.
10 Categories of Investment Misinformation
- Long-term average return charts: Average returns do not equal your return.
- Missing the best days calculations.
- Convincing investors that crashes don’t hurt until you sell, and can be easily weathered by holding.
- S&P and DJIA discrepancies: The S&P 500 takes into account six fewer crashes and four fewer major corrections than the Dow Jones Industrial Average in (only) 30 missing years.
- 91-year investment charts/The lottery phenomenon: People have far shorter Personal Periods of Return® than they think, generally around 30-35 years.
- Confusing prudent investing strategies (buying or selling strategies) with one of the 10 definitions of market timing.
- Over-diversification: Most investors have NO IDEA that after buying 10 stocks, the 11th through the 1,000th provide minimal risk-reduction benefit.
- Dalbar study: A fabrication that misrepresents investor’s behavior. It’s not irrational for not wanting to lose a lot of money.
- Efficient Market Theory, the basis for most investor’s buy and hold, indexed portfolios is not true and has been wholly refuted and rejected by Warren Buffet in the article The Superinvestors of Graham and Doddsville.
- Flagrant usage of incorrect data.
Misinformation Risk® is not based on opinion. The flaws and mistakes in the arguments and charts are quantifiable and can be proven. The difference between truth and fiction in the financial industry is often preceded by or presented with a fallacy (or 5).
When you understand the different fallacies and can recognize them you can begin to see the argument being made from a more informed perspective and then begin to potentially protect yourself from the risks of a misunderstood or misinformed message.
The Internet and the Age of Information have flooded consumers with incorrect points of view, inaccurate analyses, false conclusions and mere opinions in every aspect of their lives—few of which have more of a financial impact than in the realm of investing.
We believe it’s extremely important to begin to hone these skills.
For more information about investing and specifics on financial industry misinformation and the risks that come with it check out Squire University®, our investor research hub. There is a wealth of information there that can help solidify your planning in this new era of volatility.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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