There are many investment myths that may be hurting your financial security. Among them are beliefs that active mutual fund managers have investing skill that permits them to beat the market and that stock picking and market timing are viable investment strategies. They are viable, but only for those who make a living selling them. Here are five common investment myths. You can save a lot of money by being aware of them.
1. Market turmoil is a good reason to sell stock and wait until things settle down. Investors who stay in the market through tumultuous periods significantly outperform those who jump in and out. Over time, the stock market has steadily increased in value. We have had many critical events that have roiled the market, including Pearl Harbor, the Cuban missile crisis, the assassination of President Kennedy, and the terrorist attacks on 9/11. The DJIA closed at 112.52 the first trading session after Japan attacked Pearl Harbor. It closed at 12,044 on March 11, 2011. Investors who don’t panic are the big winners.
2. Government intervention means lower market returns. Actually, the opposite is true. For the 39-year period from Jan. 1, 1970 to Dec. 31, 2008, Socialist or Socialist-leaning countries like the United Kingdom, Canada, Sweden, France, Norway, Belgium, and Denmark had higher stock market returns than the U.S.
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3. Gold is always a good buy. There have been periods of time when gold was a great investment and as many times when it was a dud. For the 48-year period from 1945 to 1992, the annualized return on gold was 4.9 percent. The annualized return on U.S. Treasury Bills during the same period was 4.8 percent. The problem is that gold investors took significantly more risk than Treasury Bill investors to achieve almost the same returns.
4. The S&P 500 has the best returns for long term stock investors. The S&P 500 may consist of the biggest and best stocks in the U.S., but don’t confuse that with high returns. U.S. large value stocks and U.S. small value stocks both outperformed the S&P 500 for the 83-year period from 1928 to 2010.
5. The real money is made in private equity deals. Many investors believe they are unfairly disadvantaged because they don’t have access to the lucrative private equity deals offered to the big boys. These deals include venture capital and buyouts. The data tells a much different story. For the 20-year period from January 1986 to December 2005, the real money was made by investors in emerging markets. Their annualized return was a whopping 21 percent. Investors in all private equity deals had annualized returns of only 14.2 percent.
I don’t understand why there is so much misinformation about investing. One theory is that the securities industry has an economic interest in encouraging trading, which can be fueled by instilling fear and uncertainty. All investors would be far better served recognizing that what is currently passing for investing is simply part of the process of transferring your wealth to those who are helping you invest.
Dan Solin is a senior vice president of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read. His new book, The Smartest Portfolio You'll Ever Own, will be released in September, 2011.