Investment Pornography

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As investors, we are constantly bombarded with “entertainment disguised as investment advice”. We see it and hear it, in what we believe to be, credible sources (i.e. magazine covers; newspaper headlines; financial TV channels; etc.).

But what is Investment Pornography? I originally heard the term at a Dimensional Fund Advisors investment symposium. Simply put, Investment Pornography refers to the tendency of mass media to excite its readers/listeners about short-term fluctuations in the market. Also, eluding to the fact that if an event is not acted/or acted upon, it can have a negative impact on your long-term financial well-being.

In a presentation called, “The Big Tease: How the Financial Press Tickles Our Prurient Financial Interest”, Weston Wellington, a vice-president at Dimensional Fund Advisors, refers specifically to successive annual issues of Smart Money magazine from 1996 – 1998. In each of those years, the magazines include a story about the “7 best mutual funds”. If investors ran out and invested in each of the 7 funds in 1996, then he/she would have lost 6.7% that year. In 1997, the magazine listed 7 different funds, as the best, and if investors followed the “advice”, they would have been down 3.4%. In 1998, the magazine only listed 6 best mutual funds to own, and at the end of the year a portfolio of those funds would have been down 2.2%.

More recent magazine articles that aim to influence investor sentiment are: “Buy-and-hold is dead and gone”, Forbes July 2, 2010; ‘What Recovery?”, Time June 20, 2011; “401(k) letting you down? Try a foreclosed home”, Bloomberg Businessweek November 8, 2012.

Keep in mind, these sources do not have any clue about an investor’s personal financial situation. The media’s role is to sell papers/magazines or increase viewership…the more perverse the headline, the greater the call to action.

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