David Blanchett, left, and Michael Finke.

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?

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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.

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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.”

For advisors who stick to the mantra of investing for the long term, “that’s a really hard message today,” Blanchett concedes.

What to Do?

Finke asked: What about when a client comes to an advisor asking if they should invest in a certain stock, and the advisor says, “’No, that won’t help the portfolio in the long run’ but then the stock goes up 50% in next month, and [the advisor looks like] an idiot. So how do you get beyond that?”

Blanchett responded that “this is why you have an investment policy statement to show clients the value of being diversified. … It’s about being more of a behavioral coach and saying, ‘Hey, the job isn’t to beat the market but to accomplish [the client’s] goal.’”

Using a “lottery” strategy to buy stocks isn’t a consistent strategy, Finke said, and provided another suggestion for advisors while giving satisfaction to clients.

He said manager Larry Swedroe of Buckingham Strategic Wealth deals with this issue by having a core part of the portfolio, say 90%-95%, “that’s there to capture market returns, the beta, and then there is a [small] portion meant to capture alpha.”

It allows clients to invest in products “they get excited about,” Finke said. If the investor does well, great, and if not, it doesn’t hurt the portfolio much, he said.

The idea is good, Blanchett said, adding “as long as that ‘lottery’ investment is done in a measured way,” such as Swedroe’s method.

An advisor also should coach people to not watch the markets, Finke said.

“You’re a bit of a dreamer,” Blanchett teased.

“You may call me a dreamer,“ Finke responded, “but I’m not the only one.”

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