Activity: Investing Advice and How To Separate the Signal From the Noise
Open a newspaper any day of the week and you will find investing advice. The trick as an investor is to be able to differentiate between the signal and the noise and what passes for investment advice is usually noise. Have students read a few of these articles and ask them to highlight their key takeaways about investing:
- How one Mom taught her kids to invest; she bought them each a stock that they identified with (CNN Money):
Each child started by putting money into one stock — something they had a connection to. “I bought Apple (Tech30) for my son because he loves computers. I bought Disney( ) for one daughter because she loves Disney movies. And for my youngest I boughtHoneywell ( )because she was sick and taking spoons of honey for her cough, and we have a Honeywell thermometer,” she explained.,
- How can two people invest the same amount, follow the same investment strategy and still have different outcomes? Timing is everything (Editor’s note: Have students run the calculations using an investment calculator) (USA Today)
As can only happen in Exampleland, both Joe and Ralph had identical savings plans, but they would end up with vastly different results. The reason was entirely due to accidents of birth. Joe retired at the end of 2009, shortly after the worst bear market since the Great Depression, while Ralph, who retired at the end of 2013, had time for his investments to recover and even grow larger.
- Here’s a cautionary tale of what happens when you don’t have an investing strategy: 29 different brokerage accounts (WSJ):
By the time the husband and wife were referred to adviser Michael Hatch by an exasperated CPA, the couple held $1.3 million worth of securities in 29 different brokerage accounts. The paperwork for those accounts filled close to 20 bankers boxes….Mr. Hatch’s then pointed out the major flaw in their investing strategy: Holding almost 200 different investments in an effort to diversify had, in fact, the opposite effect. With husband and wife both buying and selling stocks from multiple accounts, they couldn’t keep track of their overall allocation. In fact, their holdings were now concentrated in the financia sector.
- October’s stock market swoon followed by it’s steep recovery shows the power of loss aversion to investors (The News Tribune):
“In October, the S&P 500 Index of large U.S. stocks declined 5.6 percent through Oct. 15 and then gained 8+ percent from October 16-31. For someone who is sensitive to market moves, the swift early-month declines might have caused a flight response that would soon seem irrational given the rally the rest of the month….Psychologically, people perceive losses (or declines in value in the context of an investment) as 2.5 times more powerful than gains of a similar size. Experience an investment decline of $1,000 and you feel 2.5 times as bad about the decline as you would feel good about a gain of $1,000. Therefore, most people are loss averse, and it’s clear why they may decide to sell when market prices decline.”
- Here is a so-called “pro” who during the October swoon said there were darker days ahead for the markets. Now he is admitting he is wrong (only two weeks later). You know what I think about the value of predictions (CNBC). Lots of carnival barkers out there!Equity prices are on a long-term climb higher, according to closely followed investor Dennis Gartman, who admitted he was wrong in calling a bear market just over two weeks ago. On Oct. 16, the author of the Gartman Letter told CNBC that the selloff in global markets was “the start of a bear market” that looked set to take hold for “a long period of time”. Over the previous month, the Dow Jones Industrial Average Index had fallen around 6 percent.
- Jack Bogle, the founder of Vanguard, on the importance of investing for the long term and ignoring the noise (MarketWatch):
“What’s going on in the market is domination of short-term speculation over long-term investment,” he said. “Long-term investors simply are not affected by the comings and goings of the market, where it looks like it goes up 100 points on odd-numbered days and down 100 points on even-numbered days.
“As I have said before, the daily machinations of the stock market are like a tale told by an idiot, full of sound and fury, signifying nothing,” Bogle added. “One of my favorite rules is ‘Don’t peek.’ Don’t let all the noise drown out your common sense and your wisdom. Just try not to pay that much attention, because it will have no effect whatsoever, categorically, on your lifetime investment returns.”
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.