You Can't be Serious Market Advice

I am sick and tired of the formulaic and short sited investment advice in the mainstream media. Stan Choe and Elizabeth Gramling wrote “What to do now?” for the AP this past week-end. Their article began by mentioning the 2 percent decline in the S & P 500 last week. Their market recap went on to highlight the 1 percent May 5 drop in oil. Continuing with the short sighted focus, the historical market weakness from May through October is cited. Next, to wrap up this useless article three experts recommend: 1. Consider this drop a buying opportunity. 2. Watch the calendar as demand for stocks falters this time of year and earnings drop in the summer. Therefore, investors should sell. 3. Andy Jung of Aston/Montag & Caldwell Mid Cap Growth Fund made the only sensible remark in the entire article, “We don't tend to get too whipped around by day-to-day events.” He recommended staying out of stocks unless you're in it for the long haul. Who benefits from this information? Each of the experts offered disparate advice from buy, to sell, to hold. This advice is useless for the average investor. First off, if you are not a professional trader, you should avoid making any trades based on a 2 percent decline in the S & P 500. After all, the standard deviation of the market averages about 15%, so a 2 percent move up or down is simply normal market volatility. If you are a professional trader or investment professional, then you do not need this simplistic and contradictory advice. What to do now? Stay the course. There is no reason to develop a new investing strategy based on a few percentage point drops in the S & P 500 or the time of year. In fact, any student of modern portfolio theory understands that the likelihood of beating the market though short term trading strategies is slim to none. Oh sure, you might have some luck in 2011, but Vanguard and many others have empirical research confirming lower returns for more frequent traders. Rational investing tips: 1. Understand your risk tolerance before making any investments. 2. Design an investment strategy in line with your risk tolerance. If you can't tolerate a 2 to 10% drop in your investment portfolio then you do not want a large percent of your assets in equity investments, because they are volatile. 3. If you want to spend a lot of time managing your investments, by all means, research and invest in individual stocks. 4. If you aren't interested in intensive study and portfolio management, then choose a reasonable asset allocation and rebalance once or twice per year. Forget about making investment moves based on the daily news and short term market movements. That is a low probability approach. Barbara Friedberg, MBA, MS is editor-in-chief of Barbara Friedberg Personal Finance.com where she writes to educate, inspire, and motivate for wealth in money and life. Learn about personal finance from a real life Portfolio Manager & MBA professor! Stop by the website and download a valuable free eBook, 20 Minute Guide to Investing.