Since the early 1980s, the mutual fund industry has gained extreme popularity. Before then, investors who wanted to invest outside of traditional banking products usually turned to a full-service broker. But at that time, the brokerage industry was an expensive investment choice. Mutual funds numbered about 400; now there are more than 8,000 funds holding several trillion dollars.
The amount of information dedicated to investing has increased as well. It's almost impossible these days not to stumble across a magazine, television show or even an entire TV network devoted to the topic of investing. Investment advice is literally everywhere.
I have previously discussed the incentive system that motivates brokers and other transaction-based members of our industry, saying the system is flawed -- that is, designed to benefit the person and firm doing the selling, not the client with the money to invest.
Similarly, much of the financial media also operates with an agenda that may not be in the best interest of investors. The media has one primary goal: to attract viewers. The media also knows that many investors think that in order to invest successfully, they need to know the future. As a result, all day long, CNBC and other financial stations trot an endless parade of "investment gurus" who tell investors what they want to hear -- e.g., where the market is headed, what interest rates are going to do, where to invest.
It doesn't matter whether the source is right or wrong, or even whether it has a clue as to what's going on. If these experts don't always sound like they know exactly what's going to happen, you won't watch their program. And if you don't watch their program, they (and not you) will go bankrupt.
This information can be more dangerous than the commissioned-based products you get from a salesperson. After all, the Securities and Exchange Commission and other regulators might come down hard on financial service firms that don't operate in their clients' best interests. But there is no one around to hold the financial media accountable for its actions when it steers investors into making poor decisions with their money.
There is no doubt that if a person could accurately predict the best funds, stocks or market direction, that individual could exceed the return of someone who has a well-diversified portfolio. The problem, however, is that there has never been a person who has figured out how to do it, not even Warren Buffet.
"The only value of stock forecasters is to make fortune tellers look good," Buffet once said.
There have been several Nobel Prizes awarded to academics proving that modern portfolio theory and asset allocation are the key to successful investing. To the best of my knowledge, no one has ever received a Nobel Prize for his or her insight into predicting the direction of the market, or the best stocks or mutual funds in which to invest. Yet this is exactly the information that many investors rely on to manage their life savings.
As long as there are individuals who continue believing there are "investment gurus" who hold the Holy Grail to future returns, CNBC will continue churning out the financial pornography.
Martin Krikorian, CFS, is president of Capital Wealth Management, a registered investment adviser providing "fee-only" investment management services located at 9 Billerica Road, Chelmsford. Martin can be reached at (978) 244-9254, or at www.capitalwealthmngt.com.
