Investors Beware: Reporters Trying to Help

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Includes: DIA, SPY
by: Kevin S. Price

In Sunday's Washington Post, Nancy Trejos assembled a true classic of the "what-should-investors-do-now" journalistic genre. Fortunately, Trejos quotes a couple sane observers, most notably Vanguard's Gus Sauter. But there's enough unhelpfulness in this piece to merit a few observations.

First, even the subtitle--"How to Play Your Stocks When They Keep Falling"--implies a wrong-headed approach to the financial markets. The number of Post readers who should be "playing their stocks" in any environment is vanishingly small. But let's move on to the more substantive elements here. We'll pull a few passages out and add some commentary after each item.

So if your money's tied up in the stock market, what are you to do? 

First of all, if you've properly diversified your investments among various sectors and stocks, bonds and mutual funds, strategists suggest you just hold tight.

This isn't a huge deal, but as we've noted on several previous occasions (here, for example), some journalists tend to conflate investment vehicles (in this case, mutual funds) with asset classes. They're different, of course, and reporters should know--and help their readers understand--the difference.

If you decide selling is the right move, make sure you do it a little at a time. "Selling today will lock in that loss. Our recommendation would be to continue to trim but don't do a wholesale fire sale," said William Keller, senior vice president and director of investments for the Washington region at PNC.

This notion of "locking in" losses bothers us a little. A loss is a loss, whether it's realized or not, and though tax considerations might affect one's timing preferences on the margin (in some cases making selling more attractive in order to offset realized gains), selling (or reducing) a position is either a good idea or it isn't. If it is, then lock that loss right in there!* Doing so "a little at a time" is only a good idea if one is scaling out of a position as part of a serious, systematic plan.

Yared, on the other hand, thinks that if it's a real loser, you should not be afraid to dump it. "From an investors' point of view, you have to be somewhat coldhearted," he said.

Do a lot of research beforehand, a rule that applies to both buying and selling, he said. Look at balance sheets, stock prices, growth rates, the history of the company. Read its quarterly and annual reports. All that information and more is available on the Internet, he said.

Yared's plea for coldheartedness is spot-on. But that second paragraph, the Cramer-esque bit about digging into balance sheets, growth rates, and company reports strikes us as decidedly bad advice for the vast majority of the Post's readers, advice that encourages rank-and-file investors to overestimate both their own abilities and the utility of such information in the first place.

Late in her piece, Trejos names four companies: Johnson & Johnson, Wal-Mart (or is it now *Walmart?), General Electric, and Goldman Sachs. Cue the crickets! All that stock-jockeying advice and what do we get? A semi-plausible four-stock proxy for the S&P 500. Go figure.

But let's conclude on a high note:

Of course, each individual investor has to decide how much risk he or she can tolerate and go from there, the strategists said. If all this is too much for you and you just want to hold on to your cash, that might be the right move for you, but consider this: Inflation might be on the way, and if it gets here, it'll take a big bite out of your reserves.

"Cash has its own risks, and the erosion of purchasing power is one of them," Horan said.

That's not to say you shouldn't keep cash. "You need to have a fallback of immediate liquidity whether it's a line of credit or cash at hand," Keller said. "You have to have that because these are rocky times now."

Yes, yes, and yes, with one important amendment: inflation isn't "on the way." It's already here.

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* Of course, one can "lock in" losses if one sells a position (at a relatively low price) and doesn't replace that position until asset prices have risen. But selling X and buying Y more or less at the same time doesn't "lock in a loss" so much as it changes one's exposure from X to Y.

Source

Nancy Trejos, "When You're Tied Up in a Down Market," Washington Post, June 29, 2008