Financial Pornography – What is to fear?

While certainly the title is an “attention-getter,” the problem, dare I say addiction, with Financial Pornography is more prevalent now than ever before. The 24 hour television news cycle, the ability to capture rousing financial information with the touch of a smart phone and the propensity of social media to disseminate enormous amounts of un-scrutinized information to the unsuspecting have created a minefield for investors.

So what is Financial Pornography? The term has been around for many years and Investopedia says Financial Porn is “A slang term used to describe sensationalist reports of financial news and products causing irrational buying that can be detrimental to investors’ financial health.” In 1964, Supreme Court Justice, Potter Stewart, gave a characterization of pornography that epitomizes something quite difficult to quantify by saying, “I know it when I see it…” While that may describe pornography in its most traditional sense, Financial Pornography is far more difficult to identify, especially for the lay person. Highly educated economists, world renowned writers, famous television personalities and even Ivy League educators contribute to the melee by publishing, loudly and with immense conviction, the next move of the market. Often, their predictions outline in intimate detail the rationale for buying the next stock, sector, industry, market, etc. or, even equally as damaging, selling the next stock, sector, industry, market, etc. So convincing are their arguments that many are compelled to take immediate action to take advantage of their foresight.

So what are the risks? Unfortunately, all too often it doesn’t work out as the experts had predicted. There are many logical explanations for the misinformation: 1) The markets are complex, global and constantly changing. By the time an expert releases an opinion, there is a good chance the data set has changed. 2) The expert may have little to lose, because by guessing often enough (educated guessing is still guessing) surely they will get it right the next time. Here is the rub; corrections and/or market declines are “easy” to “predict.” Think about it, the market declines every few years, always has. What has a media hungry analyst to fear from predicting a crash? Nothing, of course, since if the market doesn’t decline, everyone is happy and the analyst is “early.” If the market does decline, the analyst is a genius. He has nothing to lose. 3) Market timing, trying to find the right time to be in or out of the market, doesn’t work. Investors want to do all they can to avoid losses and/or maximize gains. But by trying to time the market, the average investor ultimately loses and many times is unable to recover.

Consider the following statistics from Morningstar1: “In 2009, money flew out of stock funds, but that proved to be the bottom of the market and a great spot to get in. Some investors were also leaning the wrong way in 2012 and 2013. The 10-year gap (in returns) between the average investor and the average fund ballooned to 2.49% by the end of 2013 from 0.95% at the end of 2012. In sum, the typical investor gained 4.8% annualized over the 10 years ended December 2013 versus 7.3% for the typical fund.” Now, 2.5% per year in annualized return doesn’t sound like much, but it is a 34% reduction in the annualized portfolio performance. In this 10-year period a $100,000 investment would have grown to either $159,813 (average investor) or $202,300 (average fund) a $42,487 difference…you choose. The guys from Morningstar get it right when they say, “The data tell a tale of poor timing, and it seems to be getting worse. I suspect the 24-hour news cycle inundates us with news and opinions leading to investing based on anxiety rather than logic. Don’t spend too much time watching TV news or checking your accounts. It only leads to bad behavior. Who cares if a talking head predicts gold will surge and stocks will tank? Focus on your needs and goals. As the data show, timing markets is too difficult, so have faith in your plan and carry on regardless…”

In short, avoid the porn.

1http://news.morningstar.com/articlenet/article.aspx?id=637022

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