Why even the best investing advice may be wrong

The gurus may be smart, but their interests aren't yours.

  • By Chuck Jaffe ,
  • MarketWatch
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"Sell everything" or "buy now" or "head for gold" makes great headlines, but isn't great strategy for individual investors.

The reason isn't that the market observers are reading fluctuations and trends differently than individuals, using specific technical analysis or analyzing contrarily the fundamentals. Nor is it that the experts are always wrong, no matter how popular that sentiment might be.

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The issue is that money managers run money, while individual investors run their own lives.

The experts you see, hear and read about live by the rules of an investment mandate and die if they can't keep up with the competition, while investors live with their decisions and modify their strategies because they can't afford to fall.

Thus, whenever you hear a market forecast and recommendation on what to do next, it pays to consider the differences between you and the guy making the recommendation.

Here are the key points to keep in mind:

You don't have to invest in accordance with a prospectus or a mandate

Money managers are expected to follow a mandate; a large-cap growth manager can't suddenly start buying small stocks in a fund, for example, and may not even be able to sell out and go to cash. An international manager can't buy domestic stocks — and a domestic manager can't load up on emerging or frontier markets — even if they believe some other part of the world is the best place to invest.

In short, you have options and solutions that work for individual investors with long-time horizons, but that don't jibe with newsletter editors, stock jockeys and pundits.

You don't have to impress anybody

Plenty of pundits and money managers work out of the public eye. The ones who are making the forecasts that sway you are gunning to make a name for themselves, or an impact.

In short, they have a reason for making a forecast, and while it might be as simple as "Someone asked for my opinion," that's more random than meaningful.

Don't be the investor who blows up a portfolio because a journalist somewhere found a colorful guy to quote on deadline on a day when the market was swinging wildly.

Their mistakes are forgotten or ignored by the time yours show up

Plenty of experts have had their minutes or months of fame, thanks to a heady prediction or savvy forecast. But when the financial media is busy responding to a 24-hour news cycle, today's prediction or recommendation will soon be forgotten.

Just think back to the Brexit vote, when a bunch of economists and market observers said things would get ugly fast in Europe. Instead, the market took a knee-jerk quick slide down — just enough for some of those pundits to claim they were right — before jumping off to new highs.

Those experts are making new predictions, but any investor who followed them and got conservative and nervous at just the wrong time is only now starting to feel the pain of a bad call.

They are worried about days; you are worried about years

Money managers make their money based on what is happening now. If they can't do right by their clients this week, month, quarter or year, they will start losing those clients fast.

Institutional investors have a notoriously short fuse; when you worry about your big clients bailing out on you because you are not keeping pace with some other guy, it encourages riskier behavior where managers take chances to set themselves apart from the competition.

Days are long for money managers, the problem for individuals is that years are short, and making short-term moves tends to derail long-term strategies.

They're managing other people's money

In an ideal world, market strategists and fund managers would have their interests — and their money — aligned with yours.

But when they make statements to the media about strategy and tactics, they're not giving away the details of their personal portfolio.

In May, I chatted with Russell Napier, author of "Anatomy of the Bear: Lessons from Wall Street's Four Great Bottoms," who was predicting a fifth bottom to come, in fairly short order. While noting parallels between the current market and 1929 — though he was not calling for an event of that magnitude — Napier made it clear that he wasn't abandoning equities despite his dark visions of the future.

He always keeps a portion of his portfolio in equities, he explained, "because I could be wrong."

Focus on investing

More on investing strategies and ways to help manage your portfolio.

Most forecasts don't come with that sort of disclaimer, but individual investors almost always should hold back from extreme actions, because the potential for a bad call by the expert is so high.

You are managing your money

That means your sense of loss is greater and more personal, and it means your risk tolerance may not be aligned with the guy who is saying "buy emerging markets now" or "lock in your profits on U.S. equities."

They key thing to remember is that the experts' conviction that they are making the correct call is irrelevant compared to your faith that their observation, advice or action is the right thing to do in order to protect and grow your portfolio.

No matter how unwavering their beliefs are about what they think investors should do or what's going to happen next in the market, you are the one living with the outcome. So trust, but verify, and diversify too — even if that means going against your beliefs to an extent, the way Napier did — because if the people whose judgment you rely on is wrong, you're the one who will pay the price.

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