Myths You’ve Got to Avoid

“Not everything that counts can be counted, and not everything that can be counted counts.”
Albert Einstein

I'm currently reading a book entitled “25 Myths You’ve got to Avoid if you want to Manage Your Money Right”, by Jonathan Clements, a columnist for the Wall St. Journal.

In his book, Clements writes on what he considers are the “old rules” of investing which no longer apply in today’s world.

Why don't these old rules apply anymore? Because the world has changed. Fixed pensions have become variable, long term employees have become short-term, inflation has disappeared, people are living longer, wages stopped rising and Harvard started charging $100,000 for four years of college tuition. I’d like to share with you three of Clements’s myths and two of my own.

Myth # 1 – Get a Good Job and Be Set For Life

We’ve all heard the buzzwords; re-engineering, restructuring, reorganizing, right-sizing and a host of others.

What it all boils down to, is that corporations no longer feel the same kind of loyalty towards their employees that they’ve felt in the past.

This translates into three distinct realities for today’s workers: (1) we need the savings to survive a prolonged period of unemployment, (2) the traditional pension is disappearing in favor of employee directed 401(k) plans and the like, and (3) most of us can forget about retiring “early”.

Saving must become a priority.

Myth # 2 - Stocks Are Risky

Certainly, stocks are risky if you need the money you’ve invested in the market to put food on the table next week.

However, for the long term investor with the discipline to ride out the markets ups and downs, stocks represent the best opportunity to achieve their financial goals.

Since World War II, stocks have returned an annualized 12.7 percent.

By far, the greater risk to an investor of not meeting his or her goals are the twin threats of inflation and taxes. What we should really worry about is whether we will have enough money left (after inflation and taxes) many years from now to retire.

Assuming a 3 percent rate of inflation, the spending power of a dollar is cut in half in just over 23 years.

Myth # 3 – Nothing Is Safer Than Money In The Bank

People generally put money in bank cash “investments” such as savings accounts, bank money-market accounts or certificates of deposit. And, banks are safe ---- just so long as you don’t mind losing money.

Clements supplies a good example: “The math is simple enough: Your savings account earns 2.5 percent , which – if you are in the 28 percent tax bracket – gets sliced down to 1.8 percent after taxes have taken their toll. Then inflation steals 3 percent. Result? Every year, your money loses over 1 percent of its value.” Great deal huh? (If you’re in the 36% tax bracket and invested in a 5 percent C.D. your real rate of return is .2 percent)

Myth # 4 – International Investing Is Too Risky

Some people believe that international investing is “too risky” and prefer to remain fully invested in U.S. securities.

But, the truth of the matter is that by not having a portion of your portfolio invested internationally, you not only increase your overall portfolio risk, but you miss out on tremendous potential returns.

Consider: of the world’s 35,639 regularly traded stocks, only 12,863 are based in the U.S. That means nearly two-thirds of all investment opportunities are based outside the United States.

Additionally, in the past five years, only about 60 percent of foreign-stock returns have moved in sync with the U.S. market and since 1974 there has been only a 45 percent correlation.

Furthermore, in 1998 the U.S. market as measured by the Dow, returned 16.10 percent. Here are some returns for other countries you may recognize:

Belgium 45.32%
Finland 68.52%
France 31.47%
Germany 17.74%
Greece 85.02%
Ireland 23.24%
Italy 40.93%

The message seems clear; it’s imperative to spread your bets. Over 50 percent of the planet’s total market value is outside the U.S. To concentrate solely on the United States is to gamble that your backyard will always continue to be the best place to invest.

Myth # 5 – Market Timing Pays Off

Several major studies have shown that “market timing” simply doesn’t work. In fact, a recent study conducted by Trinity Investment Management Corporation of 100 large pension funds that used market timing found that only 11 improved their rates of return. The others’ timing efforts actually reduced their annual returns by an average of 4.5 percent.

One of the biggest difficulties with market timing is trying to decide when to “jump back in.” Historically, the biggest gains in the market have come suddenly at the bottom of a downturn. Stocks, on average, have rebounded 9.5 percent during the first 20 days of the 11 bull markets since World War II.

Missing these first 20 days, has a significant negitive impact on your protfolio returns.

The better strategy, is the “buy & hold” approach. In the 11 bull markets mentioned above, it has taken 10.5 months for investors to recover their losses from downturns.

Invitation

I hope you find this information profitable if you’re already investing in the market. And if you’re not an investor yet, please start. It’s your future!

If you’d like to explore the option of a professionally managed investment portfolio, just give me a call.

Marshall Sitarik – CFP
Ph. 407-977-3800