The stock market opened 2016 with a giant thud, with the Dow Jones Industrial Average falling 276 points on the very first trading day. Chinese stocks were down nearly 7 percent. European stocks fell, too.
It was exactly the kind of day ordinary investors needed to be reminded to sit tight, to not do anything different from what they would have done had the Dow and the Shanghai index posted record gains. As Matt Yglesias wisely noted at Vox, panic-selling after a stock-market drop may be the most predictable blunder in personal finance.
There’s no particular reason, other than curiosity, for ordinary investors to examine the stock market’s performance more than once or twice a year—plenty of evidence indicates that it’s incredibly difficult to hand-pick stocks or time the market. This finding might bruise some egos, but it’s actually great news. It should free up any time spent scrutinizing the market for more rewarding endeavors. That’s precisely the message the financial media ought to send in turbulent times, when ordinary investors are most tempted to engage in panic-selling—or alternatively, trying to be clairvoyant in timing global-securities markets. The truth is that the same boring index funds that made sense last month, last year, and five years ago still make sense today.
Unfortunately, there’s one huge problem associated with this valuable message: No one would be excited to watch a business-news show or to buy a financial magazine that continually reminded them to simply invest in low-fee index funds. No advertiser is excited about it, either—who would want to advertise stock-market newsletters, commodity futures, or actively-managed mutual funds on programs that constantly remind viewers that these goods and services should be shunned?
Dispensing dicey stock-market advice provides a much better financial model for business media, if not for viewers. At best, listening to personalities’ investment tips is a waste of time. But it’s often worse than that. Much of this advice is harmful (though probably less harmful than the financial products being hawked during the commercial breaks).
Of course, it’s easy to disdain cable financial-news shows that use blustering anchors to present mediocre investment advice. The disdain is merited, but it carries a heavy element of snobbery, too. Which is too bad, because most highbrow financial news is only marginally less toxic.
These problems actually go back to the pre-cable beginnings of financial TV. Not even PBS is immune from spreading dangerous myths about personal investing.
In the early 1970s, PBS launched a show called Wall Street Week. For years, the hugely popular show was hosted by Louis Rukeyser, perhaps the most urbane figure in the history of financial television. He was no sleazy TV huckster, no New Age self-help guru, no financial preacher espousing the gospel of wealth. Quite the opposite: Rukeyser was dapper and cultured. He didn’t clown around. When I was a kid, many of my parents’ friends and relatives enjoyed his show, and some female viewers of a certain age found Rukeyser quite attractive. At its peak, Wall Street Week attracted 4 million weekly viewers, virtually unimaginable numbers by today’s standards for such programs. (CNBC’s daily viewership is somewhere in the neighborhood of 177,000.)
On the show, Rukeyser and his guests would dispense their favorite stock picks, and would try to predict where the Dow Jones was headed. Guests who had made correct predictions were praised, and those who fared poorly were gently chided. I recently watched an old episode, chosen at random, on YouTube. His panelists recommended, among other things, WorldCom, Compac, and other tech stocks. (Yes, this was an episode from 1999.) Not every pick was so terrible, but that’s beside the point. The problem wasn’t that the panelists were swinging for the fences and missing—it was that they were swinging at all.
In fairness, Rukeyser was a product of an earlier time. Although the value of a well-diversified portfolio had been understood for decades by the time PBS launched Wall Street Week, low-cost index funds didn’t really exist yet, and wouldn’t catch on until the mid-1980s. Now-familiar notions such as the general underperformance of actively-managed mutual funds weren’t on many people’s radar outside of academia.
When Rukeyser went on the air, it was forgivable for him to believe that he was doing a public service by helping viewers more sensibly pick stocks. But he can fairly be faulted for not moving with the times, and for failing to recognize the actual harm in what he was doing: The prediction-making that made his program so fun to watch inadvertently validated the premise of louder, more frenzied financial-advice shows.
In its quiet way, Wall Street Week spread a seductive but toxic message among people who would never have watched gonzo financial shows or conducted wild day trading. This message was that the smart investor is someone who can pick a good stock in a good company that makes good products. This thinking reflected the era, in which many investment experts suggested that smart consumers were capable of recognizing good companies as they encountered them in everyday life. As the renowned investor Peter Lynch famously phrased it, “Invest in what you know.” In my view, such messages are deeply misleading: Ordinary investors are ill-equipped to evaluate the numerous aspects of corporate performance that have nothing to do with the everyday consumer experience.
Not that professional investment managers are so great, either. A shelf-full of studies document that almost every actively managed mutual fund underperforms a simple market index. If highly trained MBAs can’t reliably pick winners, it’s hardly surprising that ordinary investors will fall short.
People don’t need confident predictions on which stocks to buy or what will happen to the stock market in 2016. Instead, they need advice about how to face real financial challenges. They rightly worry that they might not have enough money to retire or to finance their child’s college education. They’re not sure whether they’re ready to buy a first home, or when it’s wise to refinance their mortgage. People need a different financial media—one less focused on dispensing investment tips and what’s happening on Wall Street, and more focused on dispensing realistic advice about how to make big financial decisions. Some terrific journalists and financial professionals—Jane Bryant Quinn, Ron Lieber, Carl Richards, and many more—are doing this. Yet their sensible voices are often drowned out.