Stop Consuming Junk Investment Advice

By Chandan Sengupta

"How do I become a better investor?" There’s no definitive answer, but the place to start would be: Stop consuming junk investment advice. Most physician-investors think that they can improve their investment knowledge and performance by consuming as many investment books, magazines, newspapers, and CNBC shows as possible.

In reality this is not only a huge waste of time, but it can also be counterproductive—or even dangerous. The key problem is that most doctors probably don’t know enough about investing to cull the few morsels of investment wisdom that are buried in all that junk.

What it takes to be a successful investor has not changed much. But books, magazines, newspapers, or TV ad spots aren't sold by repeating the same few pieces of healthy advice. So, all these sources have to put out a lot of junk advice, sensationalize daily market fluctuations, and endless speculation about which way interest rates are going, etc. If you want to save yourself a lot of time and agony, and improve your investment performance, here are four approaches you should consider.

1) Rely on just one good investment book. If you really want to learn about investing, identify one good investment book, read it cover to cover at least three times with a yellow highlighter in hand, and then religiously follow the author's advice.

Don't read this book casually while watching TV or listening to music. You should be reading it as if you will have to pass a test on the material—study the book. If you are not willing to make that effort, do not jeopardize you and your family's future by managing your life's savings following advice you gather from here and there. Recognize that the author of a good book has synthesized information from good investment books and research work available for you. You do not need to nor can you duplicate that effort on your own.

The following are two books I highly recommend: The Four Pillars of Investing by William Bernstein, MD and The Only Guide to a Winning Investment Strategy You Will Ever Needby Larry Swedroe.

2) Invest in just three index funds. If you don’t have the time and interest to truly learn about investing, then you can do fairly well over the long run by investing in the following three index funds with proper asset allocation, or their equivalents: The Vanguard Total Stock Market Index fund, the Vanguard Total International Index fund, and the Vanguard Short-Term Bond Index fund.

3) Invest in a life-cycle fund. If you want to delegate the responsibility of doing the asset allocation and adjusting it over time, you can invest in a life-cycle fund with a target date close to your planned retirement data. These funds allocate your money to a handful of index funds and adjust the mix over the years as you approach retirement. The good thing about these funds is that everything happens automatically. So you can neither forget to make the necessary adjustments, nor can you make emotional decisions based on the market's ups and downs.

4) Work with a financial advisor. If you don’t think that you will be able to pursue one of the first three approaches with discipline and patience, then you should find a knowledgeable financial advisor who charges a reasonable fee, and then rely on them. Do not keep second-guessing them and measuring their performance every month, quarter, or year.

If you find the right financial advisor at the right price, they will most likely be able to outperform the above three methods after deducting their fees. Viewed that way, the investment management will cost you nothing or very little. But the key is to find the right person. So if you decide to take this route, put in a lot of time and effort. If you do it right the first time, you may not have to do it again for a long time.

The Bottom Line

• Don't spend your energy seeking out every bit of haphazard financial advice clogging the airways.

• Simplify your investing with index funds or a life-cycle fund.

• Seek the advice of a reputable advisor.

Chandan Sengupta, author of The Only Proven Road to Investment Success and Financial Modeling: Using Excel and VBA, currently teaches finance at the Fordham University Graduate School of Business and consults with individuals on financial planning and investment management. He welcomes questions or comments at chandansen@aol.com.