Investing lies we've all been taughtThe financial crisis has turned old saws like
'bonds are safer than stocks' and 'government bonds are safer still' on their heads. The new rules? No rules.
By MarketWatch
Bonds are safer than stocks.
Government bonds are safer than those issued by companies.
And government bonds issued by developed Western countries are safer than those issued by emerging markets in the Third World.
So say three standard financial rules that have been repeated for decades to ordinary investors from Bakersfield to Boston.
But try defending those rules to anyone holding sovereign bonds issued by the governments of Portugal, Italy, Greece or Spain.
Safe?
Financial markets have now priced in a
30% chance that Greece will default within the next five years and a nearly
20% chance in the case of Portugal, according to CMA DataVision in London, which tracks the data. The perceived risks for Spain and Italy aren't much lower.
Sure, maybe the markets are being too gloomy. But the participants buying and selling bond insurance are sophisticated, and they can't all be stupid. Would you bet your life savings that they are wrong?
So much for the 'rules'
News that some European Union sovereign bonds are actually quite risky means yet another sacred cow of investing has been turned into hamburger.
One of the undertold stories of this financial crisis has been the way it's made mincemeat of so many of the financial "rules" we grew up with in previous decades.
Do stocks outperform bonds? Nope. That's what millions were told in the late 1990s. But since then, stocks have done worse. Indeed, stocks have done even worse than ordinary bank accounts, something that the old rules of money said was virtually impossible.
Are value stocks (in other words, cheaper stocks, usually in more established companies) safer than growth stocks? Hardly. Once again, that's what people were told. Many Americans who are nearing retirement were encouraged to load up on value stocks on the grounds they were safer, but the results were horrendous.
Value funds actually plunged much further in the crash than those investing in the supposedly riskier stocks of faster-growing companies.
A potential crisis in sovereign bonds?
Will diversification protect you? That was another canard. Investors were encouraged to spread their money across different "investment styles" -- large-cap value, midcap blend, small-cap growth, international and so on -- in the belief that this diversification would keep them safe. So much for that. Those areas all fell together when the crash came.
Most of these investment styles are meaningless terms anyway. There is no more an asset class like "midcap blend" than there is an asset class "stocks that begin with a vowel."
The past few years have not been kind to the old, simplistic rules. Call it the Bonfire of the Inanities.
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