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It's Time to Stop the Plundering of Investors

Daniel Solin

The first quarter of 2012 was a good one for the markets. According to an insightful blog by Weston Wellington, vice president of Dimensional Fund Advisors, the S&P 500 Index gained 28.1 percent from a low for the year on October 3, 2011 through March 30, 2012. The Russell 2000 Index also increased by an impressive 36.2 percent.

Check your returns. I suspect many of you did not achieve anything close to those results. Why is there a disconnect between the performance of the markets and your returns? You probably paid attention to financial experts in the media. Here's one of many examples:

The Economist ran this cover story on October 1, 2011: Be Afraid. The subtitle tells you everything you need to know about the dire views of the author: "Unless politicians act more boldly, the world economy will keep heading towards a black hole."

The author justified his views with a litany of depressing economic news, including the possible failure of the Euro, irresponsible fiscal brinkmanship by politicians in Washington, and an increasingly dark economic backdrop. The list goes on. The author concluded with this worrisome observation: "At a time of enormous problems, the politicians seem Lilliputian. That's the real reason to be afraid."

If you dumped your stocks, your returns suffered. Now history is repeating itself. On April 7, 2012, the New York Times featured this catchy quote from Ed Yardeni, president of Yardeni Research: "This is the Rodney Dangerfield of bull markets. It doesn't get any respect. The naysayers have been badmouthing it really since the start." Yardeni noted that he is "skeptical about the skepticism."

So what's an investor to do? Should you pay attention to those who believe the market is poised to take off or tank? The answer may surprise you: Ignore these experts and the financial media that breathlessly reports their latest musings.

I remain mystified why so many investors rely on those who claim the ability to predict the future, when their track record is so poor. I have seen no evidence that experts have predictive skills. Sometimes they are right and sometimes they are wrong, which is exactly what you would expect from random chance.

Trying to predict the direction of the markets is grist for the mill for brokers, insurance companies, and the financial media. Have you ever asked your broker to provide you with a list of his predictions over the past ten years so you could determine his track record? Did your broker warn you in 2008 about the greatest recession since the Great Depression and tell you to get out the market? Did he tell you to reenter the market in late 2009 so you could benefit from the rapid recovery?

The fundamental premise of the retail brokerage community is they add value by engaging in stock picking, fund manager picking, and market timing. How is that working for you?

Fortunately, there is a better way. Ignore all financial predictions. Don't read or view the financial media that pretends to have predictive powers unless you find it entertaining. Cancel your retail brokerage account. Follow the advice in The Smartest Investment Book You'll Ever Read, and purchase a globally diversified portfolio of low management fee index funds in an asset allocation suitable for your ability to withstand market volatility (which is inevitable).

It's time for the plundering of your hard earned money to stop. You need to take the first step.

Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book, The Smartest Money Book You'll Ever Read, was published on December 27, 2011.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

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