Jim Cramer and I are natural adversaries, like the polecat and the duck. (In this analogy, I’m the duck.) He gives false hope to investors by providing “advice” that often only causes harm. It’s rarely backed up by sound data. I, by contrast, try to empower investors by demystifying the world of investing. I attempt to show investors they’re likely to outperform most professional money managers simply by buying index funds and ignoring most of the financial media. I rely on sound, credible data, which I refer to frequently in my books and blogs.
My Perspective
In 2006, I wrote the first of my “Smartest” series of investing books, “The Smartest Investing Book You’ll Ever Read.” In it, I argue that investors should first determine their asset allocation and then consider buying three index funds directly from Vanguard: the Total Stock Market Index Fund (VTSMX), the Total International Stock Index Fund (VGTSX) and the Total Bond Index Fund (VBMFX). I advised rebalancing once or twice a year to keep your portfolio in line with your risk profile. That’s it.
My suggestions involve no market timing, no stock picking, and no attempts to figure out who the next “hot” fund manager will be.
Cramer’s “Advice”
On Sept. 25, 2014, the Dow Jones industrial average (^DJI) lost 264 points in a broad sell-off. This caused Cramer to go on an extraordinary anti-index fund rant. He advised his dwindling number of viewers that if they “put in the time” to determine when to enter and exit the market, their “rewards will be far greater than the average index fund.” He believes “timing” is the key to making money in the market, and that he is the one to teach you how to do it.
As usual, Cramer provided no data (much less peer-reviewed research) to support his claim that he has successfully timed the market, or that anyone has this skill.
The Data on Market Timing
For those who might want real data on the subject, Mark Hulbert analyzed the track records of 103 market timing strategies over the past 10 years. He found that a whopping 80 percent of these market timing professionals failed over any reasonable period of time.
A study by CXO Advisory Group examined 6,582 forecasts for the U.S. stock market offered publicly from 2005 through 2012 by 68 “experts.” The aggregate accuracy of these “gurus” was below 50 percent, meaning their predictions were a bit less effective than basing your investing strategy on the toss of a coin.
Significantly, Cramer’s market timing accuracy was only 46.8 percent. Maybe he would have done better if he had “put in the time,” but I doubt it.
Cramer doesn’t publicly mention his dismal track record, nor does he discuss the other downsides of a market timing strategy, such as higher transaction costs and an increased tax liability.
What about managers of tactical asset allocation funds? You might think they would be experts in market timing, since the premise of these funds is that they are supposed to have the ability to dump stocks before the market crashes and buy them before they recover.
A study by Morningstar of 112 tactical funds from July 31, 2010, through Dec. 31, 2011, found “very few” of the funds studied delivered better risk-adjusted returns than Vanguard’s Balanced Index Fund (VBINX), which passively invests its assets in a portfolio consisting of 60 percent stocks and 40 percent bonds. Most of the funds studied had lower returns than the Vanguard fund and “were more volatile and prone to downside or both.”
Legitimate Financial Experts Don’t Believe in Market Timing
It’s sad that Cramer uses his bully pulpit to disseminate advice that has so much potential to harm investors. Highly respected financial experts are on record advising against market timing — experts including Warren Buffett, Peter Lynch, Jason Zweig, Charles Ellis and Bernard Baruch.
The Economist surveyed the various measures used to time the market and concluded: “It is perhaps inevitable that there is no easy way to time the market; otherwise, it would have been discovered, exploited and eliminated before now.”
Do you really believe Cramer has made this discovery when it has eluded so many others? His own record says otherwise.
Historical Results of Index-Based Investing
Cramer’s recent eruption of index-fund bashing included the misleading argument that investing in those funds didn’t protect investors during the market meltdown that started in 2008. At best, this is a half-truth. No one claims that indexing will protect investors in every market. In my books, and in books by others (Burton Malkiel, William Bernstein, Larry Swedroe, John Bogle), indexing proponents counsel investors to determine the right asset allocation ratio for their needs, and to buy and hold their investments for the long term. Investors with a time horizon shorter than five-years should have little or no exposure to stock market risk.
I asked Sean Kelly of Kelly & Associates to run the returns of my sample Vanguard portfolio, consisting of the three index funds noted above. He assumed an asset allocation of 60 percent stocks and 40 percent bonds, which is common although not suitable for everyone. He also assumed annual rebalancing. In order to avoid the claim that I was cherry picking times, I asked him to calculate returns over the following wide range of periods:
Period and Average Annual Return (Geometric)
1970-2013: 9.71 percent
1994-2013: 7.75 percent
2004-2013: 7.11 percent
2009-2013: 12.02 percent
Keep in mind that only 60 percent of the assets in these portfolios were exposed to stock market risk.
Ethical Issues
Especially in times of market volatility, investors are understandably anxious. Cramer has every right to his opinion. CNBC is in the ratings business and is largely supported by advertisers from the securities industry. Those advertisers benefit when investors move their money in and out the markets, generating transaction fees. Nevertheless, is it ethical to dispense “advice” that is contradicted by an overwhelming amount of academic data? If Cramer believes he has not only the ability to successfully time the market, but to teach his viewers how to do so as well, shouldn’t we expect that he will provide credible support for these claims? Shouldn’t he at least refer to the data indicating the high likelihood that those who attempt to time the market are likely to underperform the market?
What do you think?
Managed to get that raise or promotion? Fantastic — now don’t go out there and spend it all immediately. In classic "keeping up with the Joneses" fashion, too many of us see an increase in salary or a sudden windfall (like an inheritance) as an excuse to take our lifestyle up a notch. We buy bigger houses than we need, get the latest gadgets even though ours work just fine,and spring for fancy steak dinners just because we can.
Instead, whenever your financial situation gets a boost, consider the best ways to put that money to work for you. The truly wealthy are those whose money continues to grow and earn them more, even when they’re not actively doing anything with it.
1. Lifestyle inflation
The average American household that carries credit card debt holds a balance of around $15,000. If you’re among those who have a credit card balance, you’ve probably seen the little chart on your monthly statement telling you how much you’ll pay in interest over the next several years if you make only the minimum payment. (If you haven’t, look at it.) The same chart will also compare that to a "suggested" payment that’s slightly higher.
Our recommendation? Throw everything you can at paying your balances off as fast as possible. And make sure not to take on any additional debt in the future; if you can’t pay for a consumer good out of pocket, don’t finance it.
2. Credit card debt
We don’t demonize student loan debt the way we do credit card debt because we see an education as an investment — and higher education often is the difference between one income bracket and another. Similarly, many people justify taking out a car loan by stating that they need a car to get to work.
That said, debt is still debt, and the longer you take to pay it off, the more interest you’ll pay. Once you’ve freed yourself of credit card debt, paying down your car and student loan balances should be next on your list.
3. Car loan and student loan debt
Whether it’s to handle an unexpected car repair, a sudden illness or a major plumbing problem, you should always have some money set aside to cover unforeseen expenses. Set up a regular monthly transfer from your checking to your savings account to earmark this money before you’re tempted to touch it. If necessary, cut back in another budget category (like eating out or entertainment) to free up the funds to save more.
Putting aside a little each month could prevent you from getting socked with a hefty bill you can’t afford and then need to finance.
4. No emergency savings
No matter your age, you should be adding to your retirement funds — such as your 401(k) or individual retirement account — each month. Just setting aside money sporadically won’t cut it; you need to identify how much you’ll need to live on once you stop working and monitor whether you’re on track to reach that amount.
Here’s a quick-and-dirty rule of thumb: multiply your annual spending by 25. This is the amount you’ll need in your retirement portfolio, if you assume that you’ll withdraw 4 percent per year to live on during your retirement. In other words, you’d need $1 million in your portfolio to live on $40,000 annually. Creating a plan will help you make sure you’re able to retire the way you envision.
5. No official retirement plan
A home is a big investment, and sometimes that investment doesn’t wind up netting you the return you thought it would.
The biggest culprit is having too large a balance on your mortgage, which detracts from your own personal stake in the current market value for your home. The sooner you pay this amount down, the better your home equity will be.
You also want to be careful when purchasing a new home. Buying in a neighborhood that’s on the downward spiral or buying the most expensive home on the block, likely won’t net you a good return when it’s time to sell. Also take care to stay away from custom renovations (like turning the garage into a recreation room), which could negatively affect your resale value.
6. Poor home equity
Paying high investment fees eats away at your gains. And since your gains compound over time, this creates a domino effect that can really chip away at your wealth. Take a close look at your investment companies’ fees and shop around to make sure they’re not taking more of your money than they need to be.
7. High investment fees
If you don’t have a long-term investment vision and are simply playing the market, you could seriously undermine your wealth-building potential. Stop paying attention to market fluctuations, media pundits and the stories of your friends and family. Instead, create your own long-term investment strategy that will maximize your overall returns. Resist the urge it play it ultra-conservative (or fall for get-rich-quick schemes) and educate yourself on the best way to make your dollars work for you.
If you’re having trouble making sense of your options or want a second opinion, seek the help of a trusted financial adviser.
8. Risky investments
Based on your experience and seniority level, education and industry, you should have a fairly good idea how much you ought to be making at your job. If you don’t, check out a site like PayScale to get a ballpark figure.
If you’re not making what you’re worth, you’re doing more than leaving money on the table; you’re also losing all the compound growth and investment returns that money could be generating for you. Invest in yourself with professional development and continuing education, make the case for that raise or promotion, or seek out a company who will value you higher.
9. Making less than you're worth
If you don’t have proper insurance coverage, you’re taking a very big risk that could come back to bite you. Too many people think the worst can’t happen to them, but the hard truth is you can’t predict the future, and scrimping on sufficient insurance is never a good idea.
Of all the things we’re hesitate to part with our money for, adequate insurance coverage should not be one of them. No matter your age, everyone should be properly covered with:
Health insurance.
Disability insurance.
Homeowner’s or renter’s insurance.
Flood insurance (if you live in a flood-prone area).
Umbrella liability insurance (especially if you own a small business).
If a spouse or children relies on you for support, make sure you have a decent term life insurance policy, as well.
10. Insufficient insurance coverage
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