I was reading The March 2005 issue of Consumer Reports (CR) the highly regarded and respected consumer information guide.  Designed to protect and educate its readership on products and services. I ran across an article that offered advice to mutual fund investors.  The article focused on picking top performing mutual funds in which investors could invest to gain superior returns in the future.  I am a subscriber and big fan of using Consumer Reports when buying household products, automobiles and other consumer items. But as I read this article it was a reminder, that one of the parts of the “Investors dilemma” is Information overload.

It seems everyone is willing to share their plan to beat the market or pick the winners. Television and radio have shows about investing available 24 hours a day.  The newspapers all have investor advice columns (it was amazing to read the paper in December with all the year end secrets.) CNBC currently has a new anchorperson that does a self-promotion stating, “If you don’t think business news is exciting you are not watching CNBC”.  What they are saying is; CNBC should be watched for entertainment purposes only.

This is a warning that should be stamped on all financial shows and investment articles, which try to tell the investing public of a program or method that can beat the market. Remember how they earn their money.  It is not based on giving quality information, but by the presentation of it.  Motivating people to watch read or listen is there only goal. Millions of dollars are spent on advertising for shows and magazines every year; and the advertisers do not care if the information being given is sound investment advice.  All they want to know is that you will watch the same time next week or buy the next issue. Therefore the shows and articles have to be exciting and glamorous, with catchy headlines and promos. Unfortunately sound investing is dull and boring - herein lies the problem.

Sound investing is just like dieting.  Everyone knows that to loose weight you need to do only two things - eat less and move more. Yet just go into your local book store and look at the thousands of books that have the best, new, totally different, guaranteed, sure-fire diet to make you trim in 30 days. When diet is typed into Google.com it finds 65,200,000 pages all with different ways of saying, “eat less and move more!” Investing is the same; it all comes down to a few simple rules, yet that doesn’t stop the never-ending flow of gimmicks.

Keep it simple. Investing has three simple rules: 1) Buy equities, 2) Diversify, 3) Rebalance. Repeat until you die. All the other information that bombards us from every angle does nothing but add fear and confusion to our lives. Look at the number of books and magazines all claiming to have the secret or sure-fire way to improve your investment results. Not to mention the 90,500,000 pages found on the World Wide Web.

Let’s look at two flaws with the CR article:

Past performance has no correlation to future results.  CR used a database called Morningstar, which is available to anyone for around a thousand dollars a year.  It is a great tool for telling you what has already happened. It is a great scorecard and keeper of history, but the disconnect is when you try to use that information to make a decision regarding the future. It just does not work. It is like predicting tomorrow’s weather solely based on what happened yesterday. Past performance may be helpful when you are considering a refrigerator, but it has been shown to be ineffective in picking mutual funds.

The tracking or monitoring of money managers is also a loser’s game. Depending on whose study you read, 92 to 96 percent of a portfolios return will be derived from the correlation of the asset classes it holds (stick with me here), only 4 to 8 percent of the return will be derived from stock selection and market timing (Hiring a fund manager).  Digging deeper into the research, you find that 100 percent of the positive return comes from the allocation; the timing and stock picking actually generates a negative return!  So the question then, is do you want to focus your time on the 96 percent of the problem, or the 4 percent.  I look at it like this; if I were in a hospital and a doctor just told me I had a heart condition that could be treated with one of two pills, the first pill got great results and worked very fast to a complete recovery but only 5 percent of the time, the second pill worked slower over time and would require a longer recovery but it worked 95 percent of the time - which pill am I taking?

Efficient market investing will not sell magazines. It is dull and boring. However, it is the basis for a sound long-term investment strategy. Believe the Markets are efficient.  Invest accordingly and sleep well at night!

		Jon Bucklin CFP, RFC is an investor coach and managing member of Wealth Management Partners LLC, RIA in Okemos.