Advice Needs to be Responsible

I have a lot of respect for CNBC anchor woman Maria Bartiromo. I started watching her when she first started with CNBC well over 10 years ago. She has been a huge success in a business, especially back then was considered a “man’s world.” I have enjoyed seeing her succeed.

Right now there is a lot of advice given to the average investor when it comes to investing money in difficult times. What concerns me is that most advice is given by the industry and is really not accurate advice.

Maria was being interviewed by Tim Russert on Meet the Press. While getting ready for church, I happened to have the sound turned up on the television.

They were talking about the credit crunch and everything this country faces. Tim Russert looked at her and asked, “An investor with their portfolio today, what should they be doing?”

I was a little surprised at the response. I feel like a journalist in her position should have a better answer. First, she said that anyone who has money in a bank will be fine. Your money is fine because it is insured by the FDIC. Well, that isn’t entirely accurate. Accounts are only FDIC insured up to $100,000.

Second, she talked about that investors should always assess the risk that they are taking. Then she started discussing the importance of diversification. My initial thoughts were that she was really going to deliver some sound information for listeners to consider. Then the wheels fell off the bus.

She stated that she thinks that investors should invest in “three buckets.” Keep in mind that this example was further explaining diversification.

The first bucket is a simple savings account. You should have money set back for a rainy day. Second, you should have money invested in a 401(k) plan. Third, you should have money invested in stocks because stocks will outperform all asset classes in the long-term.

Here is the problem – the industry keeps distorting the important definition of diversification. Diversification is THE KEY to managing risk. Her definition of diversification is investing in a 401(k) plan and then investing in stocks. So the average investor would listen to that and think…..Well, I have a savings account. I have stocks. I have a 401(k) plan. I must be OK. Those three have nothing to do with diversification.

The most important concept that I can relay to you is diversification. Most investment strategies are far from diversification and invested way too much in stocks. If you have not done so, please read my report on diversification.

Oh and incidentally, stocks have not outperformed ALL asset classes over the long-term. Of course she was suggesting that long-term was 10 years or more.

The Citigroup Corporate Bond Index over the last 10 years has earned 7% while the Dow Jones has earned a 4.81% average. Over the last 79 years, the Dow Jones Industrial Average earned 4.94% and the Citigroup Corporate Bond Index earned an annual average of 5.88%.

Remember, ALWAYS is not a good word to count on in the wonderful world of investments.

Copyright © 2008 Prudent Money and Bob Brooks.