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Be Careful with Advice on 2011’s Hottest Investments

At the end of the year, the financial press is filled with financial retrospectives and prognostications. Pick up your favorite monthly financial magazine and you’re treated to articles that tell you the best stocks and mutual funds to own for 2011.

That a calendar event has any bearing on why it may be time to load up on a given stock seems nonsensical. If the financial analyst or journalist comes across a good idea in September, it’s hard to understand why we should wait until the end of the year.

My recommendation is that when you discover a headline trumpeting the top funds for the new year, you promptly recycle it and get on with some activity that is more profitable or at least more enjoyable. Whenever advice is rendered, whether from a financial planner, an insurance agent or via an article in the financial press, it’s wise to consider the motivation of the source of information.

Put yourself in the shoes of a publisher of a monthly financial magazine. Your job is to inform and entertain the public, but also to attract a loyal and wealthy readership in order to maximize advertiser support. The most profitable and proven strategy for investors to accumulate wealth is to put your dollars into investments with stakes in hundreds or more individual stocks and bonds.

Index funds do a good job of this, with one example being the Vanguard Large Cap Index Fund with 750 U.S. stocks at a cost of 0.26 percent a year. The even more prosaically named passively managed funds, which are not forced to strictly follow a given index, can be attractive investments as well.

When it comes to investments, cheaper is usually better as Morningstar recently released a study concluding that lower cost funds outperform the averages in all time periods.

But imagine the quandary of the beleaguered financial publisher. The headlines are enough to bring on a midwinter’s nap. Index your way to wealth today! Passively managed funds win again!

As these headlines could conceivably be run every month, they are hardly the action-oriented, cocksure rallying cries that will encourage readers to pass over Outside Magazine in the checkout line. They need something like “the 10-bagger stocks for the next decade.”

Financial pornography is perhaps the best term for this phenomenon. It is that shiny object that we catch in the corner of our eye that distracts, but does little to enhance our long-term well being.

How do you spot financial writing that’s injurious to your wealth? Headlines such as the “Best Ten Stocks for 2011” are a clear giveaway. Wise investors should avoid articles that emphasize superlative returns and quick results — the hottest sectors, the best mutual funds and the smartest strategies.

Weston Wellington of Dimensional Fund Advisors torments this illicit segment of the financial press, reminding us that Business Week and Money Magazine published reasons to avoid Apple stock in 2001 and 2004 respectively. In April 2004, Apple could be found at $23 a share and has since appreciated to more than $320. Fortune urged readers to sell Amazon.com at $12 in 2001. It’s now priced at over $180.

If you’re dead set on improving your financial knowledge, there are many books that detail reasoned investment approaches that have stood the test of time. While we’ll review some promising new ones later this season, the Investment Answer by Daniel Goldie and Gordon Murray is an easily digestible book that punches far above its 93 pages.

It may not be your winning lottery ticket, but it can get you on the road for financial success in 2011.

Dave Gardner, for the Daily Camera.