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Beware of Those Who Promise the Secret Sauce

Check out this baloney I got in an email earlier this month inviting me to an investing meet-up (no joke – this is real!!):

Articles by Betterment Editors
By the Editorial Staff Betterment Resource Center Published Jul. 09, 2012
Published Jul. 09, 2012
2 min read

“There will be a lot of opportunity this summer to make money in the markets. This is not always the case, since the market spends 80% of the time moving sideways. Only rarely, does an event like the 2008 Credit Crisis or 1987 market crash come along that allows you to get in at cheap prices that makes returns of several 100% possible. This summer and fall looks like it will be the next such opportunity.”

Several hundred percent?? I’m in!

I laugh when I read promises like this. Returns like this, in the current economy, are highly unlikely, nigh impossible. But someone must be paying attention, and that’s a worry.

There will always be the “expert” who promises he/she has the secret sauce to investing success, and sadly, there will always be the fools who fall for it. When something sounds too good to be true, it usually is…

The Economist Smirk

Carl Richards, author of The Behavior Gap, whose ideas we often share on this blog, has an interesting perspective on this:

“Recently, I discovered that there is an Economist smirk. This smirk suggests that you have a secret, that you are part of an elite group of people who think deeply about the issues and have the information they need to navigate the world more skillfully than other people.”

Don’t get me wrong – The Economist is a great magazine. It’s more thoughtful about the issues than most publications, but “The Economist Smirk” captures the misguided idea that there’s a secret to investing. Richards rightly points out that over one million people buy The Economist per week – do they all have the secret hot gossip?

The answer is no. When a stock becomes a trend it is likely the worst time to buy it – investor sentiment drives up the price so you will likely pay more than the stock is worth. Individual stock picking is risky, and even the most informed people are capable of making bad decisions.

In a recent Forbes article, Jon Stein talked about the perils of individual stock picking in regards to Facebook. His closing sentence sums up the futility of chasing the secret sauce:

“Many signs point to Facebook’s growth over the long term, but I for one, am not willing to lose countless nights of sleep, my sanity, or my dollars to the likely short term volatility… and neither should you.”

For most people, the best portfolio to own is the market portfolio. It’s not as exciting as the promise of several hundred percent returns, but it’s a surer bet (and that’s actually pretty exciting).

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