All you have to do is tune in to a financial advice show on TV, listen to a financial planner on the radio, or log in to a financial advice website, and you're sure to find one: The self-appointed financial "expert" or investment "guru" with the hot stock tip of the day. From the latest market direction predictions to opinions on economic conditions, these financial pundits may sound intelligent, but their predictions are, historically, the opposite of accurate.
"But wait," you may be thinking, "if the Fed is going to raise interest rates or that commodity price is going to skyrocket, shouldn't I be paying attention — so I can react? If this financial guru has tips on which stock to pick, based on their extensive knowledge, shouldn't I jump on the chance?"
The answer is a resounding no... and here's why.
Why Do So Many Investment Firms Recommend an Active Investment Approach?
The reason you shouldn't take financial punditry seriously is simple: They're not accurate. It's also quantifiable; the CXO Advisory Group analyzed 6,582 stock market predictions, offered by 68 self-proclaimed financial experts and investment professionals between 1998 and 2012. Their aggregate accuracy rate? 47.4 percent or, in other words, worse than you'd statistically do if you tossed a coin and picked stocks based on the results.
Let's look at a few "gurus'" accuracy rates:
- Jim Cramer of CNBC fame -- 46.8 percent
- MSN Money's Jim Jubak -- 43.4 percent
- Abby Joseph Cohen, senior investment strategist at Goldman Sachs -- 35.1 percent
- Elliot Wave International's Robert Prechter -- 20.8 percent
- Bob Brinker of MoneyTalk radio -- 53 percent
How is that so many investment professionals have such dismal success rates, yet still keep their "guru" status? Interestingly enough, you don't generally hear these study results bandied about in the financial media. Rather, you're more likely to hear about the few times a financial guru made an accurate prediction. After all, it is more exciting to report on a single large success, rather than a series of mediocre-to-poor predictions.
And to give these investment professionals the benefit of the doubt, in today's world of content-driven media, there's likely pressure to come up with opinions and predictions in order to keep ratings up and the airwaves pumping out content. Consider that, in many cases, financial shows like to host repeat guests with strong opinions who are virtually guaranteed to elicit debate and controversy amongst viewers. It simply makes for good entertainment. The danger lies in taking this advice seriously.
Wealth Advisors Suggest a Passive Investment Approach
This phenomenon isn't limited to stock picking and market timing, however. Many investment professionals put out negative forecasts, predicting economic doom and gloom at every turn. Despite the fact that the markets have hit record highs in recent years, these pessimistic predictions still get a lot of press. Why? Because they pander to investors' worst fears.
In addition, fierce competition for airtime may also cause some financial gurus to make extreme predictions in order to gain attention. Remember, media is a ratings game, and the loudest, most outrageous voices often get the lion's share of airtime.
Unfortunately, many investors take these gurus at face value and take their investment advice seriously. It's easy to understand, as being on TV, radio or the Internet may seem to lend authority. Instead, consider the financial media to be what it really is: a source of entertainment. For sound, rational financial advice, rely on your trusted fee only wealth advisor.