Sunday, February 12, 2017

Trump civics: stock tips

Today, there was this exchange on Twitter from Press Secretary Sean Spicer:

Short answer:
There's no such thing as 'stock tips'. It's something the gullible believe in, like astrology. Smart people invest in a few low-cost index funds. Thus, US Weekly totally burned Spicer.

Long answer:

Yes, the media is full of 'stock tips'. Newspapers frequently have stories about hot stocks you should buy. The "Mad Money" program on cable channel CNBC, with Jim Cramer, is famous for being nothing but stock tips.

However, studies have repeatedly confirmed that there's no validity to these tips, especially those of Jim Cramer. Choosing stocks at random will deliver the same returns as investing according to the tips you see on "Mad Money". Both give the same return as an index fund, but index funds will cost you less.

It's a complicated con. Jim Cramer can always cherry pick a certain start date, a certain industry, and so on, in order to "prove" that his tips deliver better returns. But smart people see through this, which is why smart people just buy index funds. Likewise, in hindsight, picking good stocks seems so obvious. This gives one the incorrect impression that it's possible to pick good stocks with foresight. It isn't.

The goal of investing isn't to win the lottery. Those who invest this way usually get lower than market returns. Instead, the goal of investing is to simply get market returns.

By "market returns" we mean the results of low-cost index funds that track the market, such as an S&P 500 fund, or a Russell 2000 fund, and so on.

Stock markets can swing wildly and not recover for a decade. You can handle such swings when you are young, because in the long run you'll come out ahead. But as you get closer to retirement, this can hurt you. Imagine the people retiring at 65 with an S&P 500 index fund who say their entire life savings drop by half in 2009 when the stock market crashed. Thus, as you get older you should move your investments into something less volatile, bonds rather than stocks.


Ignore stock tips. You'll do better with low-cost index funds when you are young, moving your money into low-risk bonds as you get older.

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