Good People Giving Bad Advice

Many people find investing and personal finance confusing and many more find it flat out boring, so when someone becomes well-known for their expertise in these subjects and is able to gain a large audience through television, radio, podcasts, or books, it is a good thing.  They help many people understand these topics through entertaining presentations.  There are many that give excellent advice but unfortunately there are areas where they do not. 

Dave Ramsey has done more for educating the masses on personal finance than anyone I am aware of in my lifetime.  He has personally changed the paradigm of how millions view debt.  I would recommend Mr. Ramsey’s program to anyone interested in improving their personal finance situation and more specifically paying off debt.  Over the years Mr. Ramsey has expanded into other areas including taxes, accounting, real estate, insurance and investing.  Investing is the only area that I have different views and think there are better ways for one to invest.  Mr. Ramsey prescribes in his words, “good growth stock mutual funds” as the base of his investing advice.  These are typically managed mutual funds that he promotes through a group of advisors that are found through his website.  There are two problems with this: managed funds and financial advisor’s fees.  There is literally reams of data that show low-cost passively managed index funds outperform most managed funds and that fees are one of the largest detriments to your investment returns. 

Jim Cramer from CNBC seems like an intelligent and earnest guy who wants to help people.  I have watched his program on and off over the years and have enjoyed listening to the many interviews he has done with CEOs of major companies and learning about new products and processes.  His program though is based on the premise of owing individual stocks and he proposes that the average person is capably of doing this.  This is where I disagree.  In Mr. Cramer’s defense, he has come to the realization that most of an investor’s investments should be held in an index mutual fund, but he still promotes using a small part of your investments to buy individual stocks.  This is the equivalent of going to a casino based on the studies that I have read done by a long list of esteemed academics including a fair number of Nobel prize winners in economics.  Most people including professional money managers have little chance of outperforming a low-cost market based index fund.

Ric Edelman is a nationally known radio host, author, and founder of a large financial advisory firm. He does a wonderful job advising people on how to look at their money in the context of their life and I have enjoyed several of his books.  Mr. Edelman, like Mr. Cramer, did eventually come around to the advantages of index investing but due to his inherent bias of selling financial advice, he suggests an advisor along with a portfolio that is far more complicated than it needs to be, along with investing in commodities.  Most academic research shows that simple portfolios can outperform more complex portfolios and that commodity investing is similar to investing in individual stocks (difficult to outperform index funds).

Bob Brinker, a nationally syndicated radio host, is an incredibly intelligent person.  I have gained a lot of useful information from his program.  Mr. Brinker’s biggest attribute is his prescribing of self-education to his listeners and callers. He believes you should thoroughly understand what you are investing in.  Concerns I have with Mr. Brinker include his belief in managed funds and trying to time the market.  Both of these techniques have been proven through studies to be incredibly difficult if not bordering on impossible. 

Money Magazine, Kiplinger’s Finance, CNBC, Bloomberg, Fox Business all promote purchasing individual stocks.  The magazines will promote stocks to buy now, stocks to buy in a recession or which stocks performed best last year.  The television networks have guests on daily that suggest stocks to own or they have two guests on with opposing viewpoints of what to own.  None of this advice is helpful or for that matter will increase your investment returns.

All of these people have one in thing in common- they all profit from their advice in one way or another.  This is not inherently bad; you just need to realize where they are coming from.  Mr. Ramsey receives compensation through advertising and his advisors.  Mr. Cramer receives compensation through CNBC which sells advertising for his show.  Mr. Edelman receives compensation through his firm and advertising.  Mr. Brinker sells a newsletter on his show along with advertising.  The magazines and television networks are sponsored by financial advisory companies, publicly traded companies, brokerage houses, etc.  Employees of these companies are frequent guests brought on for their so-called expertise.      

This is what can make investing so confusing; you have mostly good advice mixed in with some that is not.  And unfortunately, the bad advice is what could cost you the most based on a lifetime of saving and investing.  Just 2% in lower returns and/or fees over your working life could lower your savings total by more than half.  Do not let this happen to you.

There are no easy solutions to most things in life including learning about investing.  I may not be able to make the subject any less boring for you, but once you have some knowledge the process is incredibly simple.  Check out the investing section of my website for some basic information to get started and the recommended resources section for information on investing from people who are not selling anything.

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