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Breaking Bad Trading Habits

Trading Thrills: A Hazard To Your Financial Health

I used to watch CNBC pretty much all day. Every uptick and downtick of the S&P, the Nasdaq Composite and the Dow – I was right there.

IPOs? Sure, I could tell you about them. Earnings reports, hot trades, analyst actions. All of it.

It’s exciting. It drives TV viewership. However, for investors, not only is it useless, but it’s actually dangerous.

Yes, dangerous.

Nobody makes serious life decisions based on “Monday Night Football” or “The Voice.” But for some reason, an entertainment vehicle like “Closing Bell” is considered a viable information source.

Financial media are designed to entertain, not inform. Look at the guests who get invited back repeatedly. They’re lively! Energetic! Colorful!

Meanwhile, a non-stop stream of tickers draws your attention to the bottom of the screen. Kind of like the sports scores on ESPN, isn’t it?

Here’s the problem: Excitement and thrills are hazardous to your long-term financial health.

I don’t say this lightly. For a decade, I coached people on how to trade stocks using technical indicators. For me, the “aha moment” came when I studied a multiyear chart of Apple (AAPL), and realized that an investor (not a trader) would have been better off remaining in the stock through the normal ups and downs, rather than trying to time buys and sells.

It’s exhilarating to identify something like Qihoo (QIHU) or WuXi (WX) before it rises, but how does that affect your financial plan or investment goals? Please don’t say your investment objective is “to make money.” That’s not an objective. It’s just a glib statement.

But after I left the unregulated business of selling trading ideas, and joined a registered investment advisory firm, I got a completely different look at the financial services industry.

It was eye-opening.

The first purpose of investing is to replace income. Beyond that, estate plans – such as gifting to children and grandchildren – are additional objectives. To achieve those goals, you need a plan that accurately reflects your spending needs, which incorporates expected returns of various asset classes.

Funny how you never see anybody discuss financial planning on these shows. There are plenty of very somber and dull planning-oriented blog posts on sites like U.S. News. They’ll tell you to save more than you spend. That doesn’t make for exciting, competitive sport, does it? Bring on the fast money traders, and let’s rev up our engines!

Speculating is not investing, but legions of Americans now confuse the two terms. It’s not their fault. The financial media and the brokerage industry have done a stellar job of mangling the language we use.

There’s powerful incentive for both. I’ve already discussed the media. To grow page views, subscriptions and product sales, you need new fodder all the time. That’s why there is a never-ending stream of tips on trading gold, identifying arcane chart patterns, or figuring out which upcoming economic development will obliterate markets as we know them.

On that last point, don’t laugh. Remember the Fiscal Cliff panic at the end of 2012? That’s OK if you don’t; no one else does either. But plenty of do-it-yourself investors and traders believed Washington shenanigans would result in evaporation of wealth, and they stampeded into cash.

Problem is, the professional investors didn’t behave the same way. There was some decline in U.S. stock markets, but the pros got right back in once they realized the media-manufactured crisis had passed. Retail investors? I’m amazed how many people I encounter who have remained on the sidelines, their cash just languishing and failing to keep up with inflation.

While the media like to scare you, and don’t particularly care how you allocate your money, the brokerages and mutual fund companies are dependent upon trading. They issue marketing materials like this one, citing their top 10 reasons to own stock in 2014.

Really? And what were the top reasons in 2013? Will they be different in 2015?

Look, I understand the fun and entertainment value of a hobby like trading. But it has as much to do with wealth building as any other hobby, like golf or scrapbooking.

It’s impossible to consistently pick which asset classes will lead at any given time. The data are clear on this, despite traders’ insistence that magical oscillators allow them to beat markets consistently. More than three-quarters of active fund managers can’t beat their benchmark in any given year, but do-it-yourselfers are misled into thinking the fund managers are idiots, and the at-home trader has the real advantage.

Nonsense.

I’ll write more in future columns about the incorrect use of the S&P 500 as a benchmark, and the necessity of including the entire world market – not just U.S. large cap – in your portfolio.

But for now, I’ll leave you with this: The financial TV channels don’t have your best interest at heart. Their business mandate is to sell advertising. That should tell you something.

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