Mad Money

Numerous times over the Christmas holiday investors have asked me if they should sell their stocks because of a crisis around the world. As with all ‘crisis’ events I said no, you should remain disciplined to your investment policy statement and rebalance.

Embed from Getty Images

There is constantly a crisis somewhere in the world. There will be other events both good and bad that will send shock waves, both up and down, into the stock markets.

This time, believe it or not, the markets are pulling back because the price of oil is dropping. It wasn’t long ago that the markets responded negatively to oil prices going up.

That is the point, there is no way to consistently predict market movements over the short term.

Keep in mind that in order to realize the superior long term returns of the equity markets we must control our emotions in both up and down markets. Warren Buffet has a saying I find helpful.

“Be greedy when others are fearful and fearful when others are greedy”.

In other words control your emotions there is no get quick rich scheme. If the ‘experts’ actually could predict the future why would they tell you? Fund managers, hedge funds managers, stock pickers, market timers all need investors to believe that someone can and does beat the stock market.

This is all part of their marketing strategy. When a manager actually does beat the market, (luck will allow some to win), the marketing department goes to work.

Unfortunately for investors there is no evidence that past performance correlates into future success or future losses.

Shows like Jim Cramer’s are based on their entertainment value and not on their value to investors. Investing is not a game as they make it appear. To succeed in investing for the long term you should own equities…..globally diversify….rebalance.

Any time or money you spend trying to beat the market is time wasted. Time which you could be spent improving your job skills or developing new job skills or spending time with family and friends.

So turn 2016 into the year you become an investor and not a speculator. Hire an investor coach and reduce your investing anxiety and improve your long term results.

Unfortunately, Jim Cramer is what is wrong with the 401(k) industry, in that, investors can manage their own portfolio. Most, if not all, are unable to emotionally manage their portfolio efficiently. To succeed in reaching your retirement goals you must develop a prudent strategy and reamin disciplined. This may sound easy but we are unable to make the proper decisions during times of stress. We need a coach to keep us disciplined and focused on our long term goals.

The plan proposed the most complex highway interchange attempted in Ontario to that point. (Photo credit: Wikipedia)

I am no fan of Jim Cramer. I don’t find him entertaining, although I can understand why many people do. My gripe is that his antics harm investors by making it appear his opinion on the direction of the market, or his stock-picking skill, adds value. It doesn’t. There is no evidence that his track record is better than what you could expect from random chance. In a scathing blog, Henry Blodget stated: “It would be impossible to write a ‘Bad Advice’ column about investing without discussing Jim Cramer.” David Swensen, financial author and Chief Investment Officer of Yale University, opined that Cramer “exemplifies everything that’s wrong with the advice — and I put advice in quotation marks — that is given to individual investors.” According to a 2009 study by Barron’s, “[C]ramer’s recommendations underperform the market by most measures.”I was pleasantly surprised to read a blog by Bruno J. Navarro at CNBC summarizing an interview he did with Cramer about 401(k) plans. Cramer is quoted as opining that most 401(k) plans “stink” because of high fees and lousy returns. He notes the entire system feels like it was set up to “… benefit the financial services industry, not you.” With typical bluster, he states that “almost nobody else” expresses these views.

He is mostly correct. The 401(k) system in this country is a disgrace. It is rife with conflicts of interest, high costs and terrible investment choices. The primary beneficiaries are the mutual fund industry and the brokers and insurance companies who “advise” plan sponsors.

He is wrong that only he has this insight. I set forth similar views in my book, The Smartest 401(k) Book You’ll Ever Read, published in July, 2010. Cramer’s nemesis, Vanguard Group founder John Bogle, recently observed that the 401(k) system is “profoundly flawed.”

Here’s the point Cramer misses entirely. The core problem with 401(k) plans — as Cramer noted — is terrible investment choices. Most plans offer primarily high management fees, actively managed funds, where the fund manager attempts to beat a designated benchmark. These funds are likely to underperform low-cost index funds over the long term, reducing the returns of plan participants. Since brokers and insurance companies can incrementally increase their fees by offering the more expensive funds, they often minimize or eliminate index funds from the investment options.

Active fund managers tend to underperform because they engage in stock picking, notwithstanding the numerous academic studies demonstrating that attempting to find mispriced stocks does not work.

What advice does Cramer’s Mad Money show dispense? Stock picking advice. Recently, he selected stocks he believes will benefit from a deal to avoid the fiscal cliff. This is the same activity engaged in by managers of actively managed funds in an often unsuccessful effort to “beat the markets.”

The logic underlying Cramer’s sage advice concerning the indefensible state of the 401(k) plan industry, applies with equal or greater force to his musings about stock selection. I applaud Cramer for taking on the 401(k) industry. Now he should do investors a huge favor by either dispensing academically-based advice about the perils of market timing, stock picking and fund manager selection or go off the air. Either option would be of immense benefit to investors.