The Navigoe Blog

Top 5 articles, other good reads. September 2014 Edition

Please enjoy some of the articles that I read this month, starting with my top five:

Scrambled Signals – did financial journalists fail to spot the crisis?

If you ask a financial journalist if they are dispensing financial advice, they would almost certainly say that they are not.  Yet, headlines seem to continually offer advice when they tout the “Top Stocks to Own Now!” or “Small Stocks Rise Could Soon Fade”.  So, it’s no small matter that financial journalists didn’t identify the 2007-08 financial crisis.  The problem, as the article points out, is that “newspapers tend to report on what has recently happened, not what might happen.”  Most investors tend to fall prey to the fear/greed cycle of buying when prices are high and selling when they are low.  But the problem is amplified when financial journalists feed the frenzy both on the way up and down by reporting.  As the article notes, “ In a booming economy, the bulk of articles will be explaining why things are going well. This can, of course, lead to a feedback loop in which positive stories boost investor confidence, spawning more positive stories.”

Scrambled Signals – did financial journalists fail to spot the crisis? by The Economist Magazine

The Case for Sticking With Stocks—No Matter the Price

This article is essentially a caution against market timing. Stock prices have recovered from the 2008-09 market crash lows, leading many prognosticators to comment that stocks are now overvalued. The article states three reasons that you should stick with stocks, even if you believe they may be overvalued. First, stocks deliver a higher average return than the alternatives, even starting from periods of overvaluation. Second, overvalued stocks often become even more overvalued before “correcting” back down. This is the classic dilemma in market timing: you might be right about valuations, but you aren’t rewarded for being right until the market agrees with you. Third, investors who flee markets when they are overvalued typically do not return, even when valuations return to lower levels.

The Case for Sticking With Stocks—No Matter the Price by Brett Arends, The Wall Street Journal

The Mystery of Lofty Stock Market Elevations

Speaking of heightened stock valuations, this piece by Nobelist, Robert Shiller, examines the reason for the current level of stock prices.  The CAPE (cyclically adjusted price-earnings) ratio, which Shiller is most known for, is currently above 25, which is well above its historical average of 15.  It’s worth noting that the ratio has been above 20 for nearly all of the past 20 years, making it a poor tool for timing the market (as Shiller recognizes).  Shiller concludes that he doesn’t have an explanation for the high stock market valuations, attributing it to social psychology.  Of course, as noted in the article above, using valuation measures as a tool to time the market is not advisable.

The Mystery of Lofty Stock Market Elevations, by Robert Shiller, New York Times

Can Peers Burn Holes In Your Portfolio? – The Badness of Crowds

You have probably heard that students who are friends with good students tend to have more success in the classroom.  Likewise, if you hang out with people who are fit and active, you are more likely to maintain a healthy lifestyle.  This article makes the case that the same is true of your investment habits.  If your social circle consists of investors who chase hot stock tips, or panic in the face of a market crash, you will have a higher tendency to do the same.

Can Peers Burn Holes In Your Portfolio? – The Badness of Crowds, by Jason Zweig, The Wall Street Journal

What Can Studying People From Birth to Death Teach You About Living the Good Life?

This is such a fascinating study.  Most studies of human lives and behavior look at us in a snapshot who we are in the moment.  This study is different.  Researchers followed a group of 1,000 people for the duration of their lives.  From childhood into old age, over the course of eight decades.  Many commonly held beliefs about the determinants of health and longevity are confirmed (less TV, more exercise), while others are shown to be untrue.

What Can Studying People From Birth to Death Teach You About Living the Good Life?, by Eric Barker, Time.com

Other Good Reads:

How Much For the 401(k)? Depends. Center for Retirement Research at Boston College, Squared Away Blog

Beware Leaving a Roth for Heirs, by Andrea Coombs, The Wall Street Journal

To give is to receive: Your guide to tax-smart charitable donations, by Anna Robaton, CNBC

Parents, the Children Will Be Fine. Spend Their Inheritance Now. by Ron Lieber, New York Times

Mutual Funds’ Five-Star Curse, by Javier Espinoza and Simon Constable, The Wall Street Journal

Some fun and interesting reads that are not about money and investing:

Childhood Diet Habits Set in Infancy, Studies Suggest, by Catherine Saint Louis, New York Times

Students Go Back to School and to Healthier Foods Than at Home, by Ann Lukits, The Wall Street Journal

When Cooking, Invest Time. Or Work. Not Both. by Mark Bittman, New York Times