I have brought you to this post under false pretences because I don’t have any fund or stock picks for the year ahead; but if you have read this blog before you may have already guessed that. Recommendations for individual stocks and funds are a persistent feature of the investment landscape, but are particularly prevalent at the start of the year. Unfortunately, these are a terrible idea for investors and encourage the most harmful behaviours. They should be added to the ever-increasing list of ‘stuff to ignore’.

The recommendation of specific stocks is the most egregious practice. Any single stock is a highly risky investment and has a huge range of potential outcomes; most investors do not need to be dabbling in such areas. It is also incredibly difficult to do well – even for dedicated, experienced professionals. We know that the success rate of most active equity fund managers is low and that those that are successful rarely get many more than 50% of their decisions right – why would it ever be a good idea to think that focusing on one or two companies would be prudent?

Advocating certain funds is somewhat less heinous than stocks because of the inherent diversification and ongoing stewardship, but still entirely unnecessary. Often recommendations are for flavour of the month areas, or in niche, high risk segments of the market offering the false allure of stratospheric returns.

Even if the individual suggesting the stock or fund ideas has some skill (which is impossible to know) the time horizons involved renders this irrelevant. Over a 12-month period nobody knows which stocks or funds will outperform, the amount of noise and randomness involved is overwhelming. But that doesn’t matter because next year there will be a fresh set of recommendations and the current ones will be a dim and distant memory (apart from those that have done well, which may just get a mention).

This type of endorsement leaves investors incredibly exposed. What happens if we follow a stock or fund pick and two months down the line there is a negative development? What do we do if the stock has an earnings disappointment, or a fund manager departs? There is often no recourse or requirement to update the view – we are on our own from the moment the proposal is made.

There is also no accountability. We have no meaningful way of knowing whether the person making the suggestions has expertise (not that it really matters), nor do they have any skin in the game regarding the consequences of the choices that are made.

Perhaps the most damaging aspect of such stock and fund picks is that they are typically devoid of context. What is the situation and disposition of the individual reading the article? How might this recommendation fit within a wider portfolio? Do they understand the risks involved? Individual fund and stock picks are a bad idea for us all but can be terrible for some.     

These recommendations often do little more than perpetuate a dangerous short-term mindset – offering persuasive and captivating ways of making more money and making it quickly. In truth, investors should not be focusing on any individual stock or fund, nor believe that anybody has a clue about what will perform well over the next year.

Such guidance is good for commissions and clicks, but bad for investors.

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).