A Good Example Why You Shouldn't Put Too Much Stock Into Investing Newsletters

I was at my local bank the other day and picked up a copy of their quarterly investment newsletter to see what they had to say. The latest was the “Summer” issue which comes out sometime in May. The newsletters usually some decent information regarding latest tax laws and portfolio diversification reminders, but at the end they always throw in some recent market commentary and economic outlook.

The title was April Brings Increase in Investor Optimism. Of course, that seems fitting considering that the market has just come off a tremendous rally following that sharp drop in February. So by looking at the past quarter, yes it looks like investors were quite optimistic. But what what did the newsletter say about the outlook? For starters, they state:

Investors may have some reason to be relieved. First, the concern about the spillover of the sub-prime mortgage market–one of the catalysts to the late February correction–appears to have been overstated.

Really, it has been overstated? I know it is impossible to predict the future, but to allow a few months of strong performance allow you to come to the conclusion that the sub-prime mortgage issue is overstated is a bit premature. The newsletter then goes on to say:

While the sub-prime woes are expected to have an economic impact through more restrictive credit standards and adding foreclosed homes to an already bulging inventory, the risks of a financial contagion triggered by the failure of lending organizations appears to have subsided.

Again, the newsletter states that the sub-prime lending should remain contained within the credit market, yet this proved to not be the case. The last few months have shown that this has impacted almost all sectors and markets both locally and abroad. This is again a very optimistic view made on the basis of a good three month rally prior to this going to print.

Take Advice Like This With a Grain of Salt

It doesn’t matter how large of a firm you are, how much research you’ve done, or what your track record is; it is virtually impossible to predict the future. Yes, hindsight is always 20/20, so it is easy to look back and point out everything that was wrong with the information, but that also just goes to show how easy it is to be incorrect.

Also, keep in mind that most of these newsletters, and even many media outlets are going to always put a positive spin whenever they can. They are in the business of selling investments or making money in some way through investments. If they come out with a bad outlook and scare people into pulling out of the markets, they are directly losing money. So, you’ll almost never see truly bad news come out of publications such as these.

Finally, this simply illustrates the importance of becoming educated enough where you can make your own decisions while filtering out the noise. By using some sound fundamental financial principles, a properly asset allocated portfolio, and some time, you’ll have no reason to even care what others are saying about the market.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

6 comments
Creative Investor
Creative Investor

I would definitely agree that acting on a random mention in a newsletter or advice of your barber is far from executing a prudent investment strategy. Which is why I avoid such newsletter and rather rely on my own stock screens. Certainly a very good topic to bring attention to.

Asset Manager
Asset Manager

Amen to that. We run a discretinary business, but I often get calls from clients about the latest 'hot pick' they have on an email or magazine that they have read. I am not saying they are all useless, far from it, but, as Jeremy says "looking at it with a critical eye" is the best advice around.

Viola
Viola

I read a lot of those newsletters, or at least the teaser emails they send...but don't pay for the subscriptions. Follow advice that teaches you how to invest for yourself. Advice worth looknig at to me is based on results...I like Jim Kramer & Toby Smith because you can SEE their portfolios. They are putting the money where their mouth is.

Jeremy
Jeremy

That's right, guys. There is good information out there, but it is just important that you look at it with a critical eye. The big problem is when people just take the information in them as gospel and act solely on it. A little education and some awareness can help you pull useful information out of the newsletters though.

Joe Fier
Joe Fier

Good post. Relying on others, especially a company that is probably tied into some commission with an investment, is one of the most harmful things an investor can do. Having enough knowledge to have a general idea of what's happening could probably help weeding out some of the financial advice given out by these newsletters, too.

Eric
Eric

Good post. I've been thinking about trying to find some decent investing newsletters to read on a regular basis, but your post has me thinking twice about that. I tend to get my investing advice from other sources and maybe that's a good thing. I still think there may be some good newsletters out there, that provide sound analysis, but I think I'll have to use an even more critical eye to spot the good from the bad.