Is it Smart to Follow the “Smart Money”?

Bill Gross is the founder and managing director of the investment behemoth known as PIMCO.  He’s a smart guy and he likes to share his opinion on a variety of subjects, but mostly about the future direction of financial markets.  Mr. Gross’ forecasting record has been mixed, but the financial press treats him like a king because he has a flair for the dramatic and rarely takes a “consensus” (i.e., boring) view when it comes to his predictions.


The interesting thing about forecasts (be it investments or the weather), is that they are usually measured, but rarely reported.  When’s the last time you saw a weatherman or market strategist publish their long-term forecasting record?  Obviously, there’s a reason for this lack of information.  Recently, we visited the PIMCO website and read Mr. Gross’ posts over the last five years.  Here’s a sampling of what we found:


In November 2009, he wrote “The rally in risk assets has probably peaked.”  Since then, stocks have risen 45%.  In October 2010, he was sounding the alarm bells again, saying that “future investment returns will be far lower than historical averages.”  In October 2011, he said, “There are no double-digit returns in sight.”  The stock market has risen 34% since that statement.


Granted, we cherry-picked a little to make a point, but go read his posts on your own and decide whether we are being fair or not.  Actually, we didn’t even mention his biggest mistake over the last five years (betting against long-term Treasuries in 2011, as they continued to rally dramatically).  Oh wait, we just did.


We decided to pick on Mr. Gross today, but we’re really talking about market strategists, in general.  These are all über-smart guys and gals, but the most important question is this, “Can their intelligence help you earn above-average investment returns over time?”  We emphatically say, “NO!”, and suggest that these talking heads can actually do more harm to your portfolio than good.


Interestingly, we agree with Mr. Gross on many issues facing investors today.  For example,


  • If interest rates remain low, there is a high probability that investment returns for financial assets will be lower in the future than they have been in the past.
  • Keeping interest rates artificially low for a long period of time can lead to trouble down the road.
  • Investors are assuming too much risk in the credit markets today for too little expected return.

The key difference is that we are humble enough to acknowledge that there are many extremely smart people in this business who work extremely hard every day to try and gain an edge when it comes to investing.  Therefore, no amount of (public) information can guarantee us the ability to consistently out-guess all of them collectively.  They are (we are) the Market.


Right now, a lot of individual investors are pouring money back into stock mutual funds (see chart).  Over the last four years, they have mostly been doing the opposite—selling stocks and buying bonds—maybe because of people like Mr. Gross telling them to be scared.  Now that the stock market is up 100% from the 2009 low, and the housing market is doing better, people are starting to feel more confident.  So, is this a “sell” signal?



After yanking more than $150 billion from U.S. stock mutual funds last year, investors poured $8 billion back in last week.

Not necessarily.  Just because stocks have risen 10% over the last 2 ½ months (or 100% over the last 47 months) doesn’t mean that you shouldn’t continue to invest.  The stock market doesn’t “get tired” or “need a rest” or (insert your favorite Wall Street phrase here).  After factoring in an average long-term corporate earnings growth rate, it is simple fear and greed that drives prices in the short run.  Is investor appetite for risk (and commensurate return) increasing or decreasing?  And, just as important, if investors want to increase risk, do they have the ability (the cash) to do so?

Don’t let pundits, the so-called “smart money”, influence your investment strategy.  How do you protect yourself from their influence?  First, turn off CNBC.  Second, create a financial plan.  Third, match the portfolio to the plan.  Fourth, focus on what you can control and let the rest work itself out.

In order for your plan to work, you must remain disciplined in both good and bad environments.  Be proactive, not reactive.  Think about cash flow needs in advance.  Money needed in the short-term should not be put at risk.  Long-term money can be invested more aggressively, if necessary, to achieve your financial goals.  If you need help, hire a professional.  A good independent advisor will pay for their fee many times over and provide you with something money can’t buy—peace of mind.