Financial magazines are great sources of entertainment, but often, schizophrenic sources of advice. Consider them sage money guides and you could end up questioning your financial plan—even if it’s great. Worse, if you follow their whimsical persuasions, you’ll play a costly game of musical chairs with your money.
I could be taking a bit of a risk saying this. After all, I write for a couple of magazines myself. But share a few drinks with a money writer, and (if you’re lucky) you’ll learn the root of the problem: financial magazines sway to two powerful masters, their readership and their advertisers. And neither influence is particularly good for you.Magazines need to excite readers, luring people with headlines like, “The Best Investments to Own Now!” Such covers promise fresh content. And they draw readers looking for profitable stock or fund picking pearls uncovered within. If they aren’t promising a new wealth-building strategy, buyers will find the publication that does. Financial magazines earn most of their revenue from advertisements, not subscriptions or corner store sales. By upsetting advertisers, an editor could kill a magazine. In 2006, I accidentally annoyed an advertiser myself, in a 2,400 word article I wrote, citing savings and investment tips. A single paragraph was devoted to a suggestion given to me, years previous, by a self made millionaire mechanic named Russ. “If you want to grow rich,” Russ said, “buy used cars instead of new ones; new cars depreciate quickly.”
After the piece was published, a rep from a car company called the magazine and slapped the editor on the wrist—threatening to cancel their advertising contract if he saw anything like that again. Over time, cars depreciate faster than anything else we buy. But apparently, it’s the brave writer (or the ignorant one, in my case) who risks publishing this fact.
And I don’t think the writers at Money magazine, for example, are willing to take that risk. Their July 2012 cover reads 101 Ways to Build Wealth. Some great ideas are among the magazine’s 101 savings and investment tips. But when you’re listing more than eight dozen tips, the drink gets pretty diluted. None of the 101 savings tips, however, mentions the saving benefits from buying used cars. Money magazine writers are smart. With five full paged car advertisements in the current issue, they’re not going to bite the hands that feed them. Readers searching for powerful ways to save money, however, miss out.
Don’t get me wrong. You can find some pretty good articles in financial magazines, but ads are a sceptre of influence. The July 2012 issue of Fortune magazine contains eight full-paged advertisements for banks, brokerages or fund companies. These are eight good reasons for finance writers to tap dance around investment truths that could rock the money boat.
You’ll occasionally find articles detailing the importance of low investment costs, but it’s important not to alienate active fund companies and brokerages. TD Waterhouse won’t warm to magazines regularly suggesting that the more you trade, the less you generally make. Fidelity won’t want comprehensive fund comparisons between (all of) their funds and their benchmarks. And Hartford would boil to see their costly variable annuities tossed in the hot seat of an objective analysis.
Enterprising writers and editors have a balancing act to play. You’ll find the odd writer, for example, revealing that 70-80 percent of actively managed mutual funds under-perform their benchmark indexes. But when the following pages profile a fund manager’s winning streak, it keeps the status quo.
Reporting the slim odds of a SINGLE fund outperforming the market is a relatively safe theme. But it’s as incomplete as 101 money tips omitting the used car option. Portfolios are comprised of more than one fund. The odds of putting together an actively managed portfolio and beating a portfolio of indexes are lower (perhaps) than any money magazine would dare to publish. It certainly wouldn’t please the advertisers to read what Allan S. Roth, Professor of Behavioral Finance at the University of Denver’s Graduate Tax Institute, determined when crunching the investment probabilities of active fund portfolios beating their passive counterparts.
Odds of Actively Managed Fund Portfolios Beating a Portfolio of Indexes
|Five Years||Ten Years||Twenty Five Years|
|Five Active Funds||18%||11%||3%|
|Ten Active Funds||9%||6%||1%|
|Source: Allan S. Roth, Professor of Behavioral Finance, University of Denver’s Graduate Tax Institute|
An actively managed portfolio consisting of ten mutual funds has a 9 percent chance of beating a diversified portfolio of indexes over five years; a 6 percent chance over ten years; and a 1 percent chance over 25. They’re brutal odds that (for some) are best kept secret—along with the benefits of used cars, of course.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas