Why Fidelity's New App Won't Make You a Better Investor

Fidelity has added a new GPS feature called "Stocks Nearby" to its flagship mobile app. Open it up and it shows your location on a map, plus all the businesses around you that are connected to a publicly traded company. So if you are standing next to a Starbucks, its ticker symbol (SBUX) will show up on the map with a link to info on the stock.

Fidelity's press release says the tool helps people follow the maxim "buy what you know." What that means is shopping in a packed Apple store or indulging in a delicious burger at Shake Shack might inspire you to invest in the underlying business.

The company doesn't say so, but that idea was popularized back in the 1980s by legendary Fidelity Magellan fund manager Peter Lynch, who liked to tell a story about discovering his winning investment in Hanes when his wife brought home L'Eggs pantyhose from the supermarket. Great story. And it was also great marketing, because it made investing seem a lot less mysterious.

Not a great investing strategy, though. For example, one study shows that people who invest in industries they work in do worse than traders who don't work in the business. "Investors confuse what is familiar with what is safe," says Larry Swedroe of Buckingham Asset Management.

There are several other reasons not to base investment decisions on a stroll through your neighborhood. For one, the businesses you're most familiar with are likely mostly consumer products—which means the approach would likely leave entire industries out of your portfolio.

Furthermore, says Swedroe, if buying individual companies you "know" tilts your portfolio toward companies with outposts in your home town or city, you may miss out on the protection that geographic diversification affords. Say you own real estate in your city, in addition to shares in nearby companies: Then you're especially vulnerable to a downturn in the local economy.

Even if you were to invest in a global company like Walmart—a likely stop on your shopping routine if you are among the majority of Americans—being a consumer doesn't make you an expert. "If you notice a brand is doing well, it's naive to believe you have valuable information," says Swedroe. "Mutual fund managers and other professionals have access to the same or better information about a company's prospects, so it's more likely that you are actually at a disadvantage."

In other words, you are likely to ignore the riskier qualities of a company you think you know well as a customer or as a local and feel excited about. That confirmation bias, in addition to overconfidence in your own impressions, has been shown to lead to lower returns.

Fidelity public relations director Rob Beauregard says the company does not intend for users to trade stocks without doing research first—and that the new "Stocks Nearby" tool is "an investing idea generator, not a stock picker."

No matter how it's spun, a focus on buying what you know gets the thinking backwards. You have to really know what you are buying.