In a recent podcast, Michael Finke, professor of wealth management at The American College of Financial Services, and David Blanchett, head of retirement research for Morningstar, discussed an issue many advisors face: How do you deal with clients who want to act on pundit stock tips?
For example, CNBC pundit James Cramer recently recommended that investors buy Winnebago Industries stock, predicting that RV travel would increase due to the pandemic.
Finke’s question: Should people listen to these so-called experts on television?
It’s a bad idea as those recommendations have little value, Blanchett replied. Further, there is danger in pulling people out of diversified portfolios into iffy stocks, he said.
“Yes, but that’s a boring story, diversified portfolios,” Finke countered facetiously. Cramer needs to entertain and come up with good stories, he added.
“Valuations matter a lot for broad-based indexes, but for individual companies, it’s hard [even] for professional money managers who know everything about a company to select stocks that outperform. The idea that someone watching Cramer should go in and buy stocks just seems nuts,” Blanchett said.
He noted that the no-commission web platforms that are spurring day-trading worry him.
He admitted that “staying the course” may be unexciting, but “often times the best thing to do is do nothing.”
Further, “good investing is more difficult as it can be something as simple as buying a fund or a diversified portfolio. It doesn’t require a lot of ongoing trading. But that kind of [goes] against the impulses people have with investing. And the media kind of feeds it.”
Even on websites for professional advisors, Finke noted, “you’ll see that half of the stories relate to something going on in the market right now that could guide a portfolio. But if you look at the track record of that guidance … it doesn’t have a whole lot of value but [investors] feel like it does, and [feel they] should be following that information. … But the track record is really awful for even experts in the financial community to predict what we should be doing.”