Investment Myths Busted

[winston]

Goodbye January Effect and Other Superstitions By Chao Deng

NEW YORK (TheStreet) -- The so-called "January effect" hasn't actually had much of an effect in recent years.

The term became of the Wall Street lingo when analysts noticed that investors tend to sell small stocks at the end of a year to harvest tax losses then buy the stocks up again in January.

The effect of this was to push up the performance of small caps relative to that of large caps in the first weeks of January.

The name is now a misnomer, as the trend actually begins much earlier. Investors try to get ahead of the game as early as the end of October, pushing up the performance of small caps well before the new year.

http://www.thestreet.com/story/11355066 ... tions.html

[winston]

The Massive Myth About the Economy and the Stock Market By Dr. Steve Sjuggerud
Wednesday, May 14, 2014

You hear it every day. Too bad it's completely wrong…

Every day on the financial news, you hear "the economy is doing better, so stocks should do better" or words to that effect.

It sounds like sensible advice… What could be wrong with that?

If the economy is doing better, then companies should be making more money, right? And if companies are making more money, then their stock prices should go up, right?

It sounds like it makes sense. But that's not the way the world works…

The truth is, you want to buy when things look bad. That's when you make the most money.

That's not just my opinion. History shows that it's true.

The best time to own stocks, it turns out, is when the economy is shrinking. You may be surprised to hear it. But it's true.

We found this by simply comparing stock-market returns with economic growth. Specifically, we looked at the S&P 500 index for stocks and the U.S. gross domestic product (GDP) for the economy. U.S. GDP data starts in 1947, so that's where we began testing.

Here's what we found…

Let's say you bought stocks at the end of any quarter when times were bad (when the economy was shrinking), and then you held stocks for the next 12 months.

You may be surprised to learn that you would have done incredibly well – the return in those periods was more than twice the return of "buy and hold" investing over all periods.

The opposite is true as well… When the economy is doing extremely well, you actually make significantly less money than the "buy and hold" method.

You've seen this idea at work over the past few years…

The recent recession bottomed in mid-2009, right as U.S. stocks began their historic rise.

Back then, "experts" said stocks couldn't rise because of the bad economy. They were wrong, of course. And once the economy boomed again, the experts on TV told you it was time to buy. They are wrong once again.

Most investors think that you need the economy to be doing well to make money in stocks.

They have no idea that the opposite is true.

It's one of the most pervasive myths in investing. Don't fall for it. Instead…

Please remember that this is the truth: You make the biggest gains in stocks by buying during recessions – when the economy is doing poorly. And stocks make their smallest gains when the economy is absolutely booming.

It might sound counterintuitive… but it's absolutely true.

Don't forget it!


Source: Daily Wealth

[winston]

Here’s what happens when you buy stocks at their all time highs By Simon Black

One of the great myths about investing that we’re told by the mainstream investment education is that we should “buy and hold” for the long term.

I remember being taught in a personal finance class long ago that I should just buy the S&P 500 index, walk away, and that years later I will have achieved huge gains.

The premise is that over a long period of time, it doesn’t really matter at what point you get in and out. The long-term trend of the stock market portends that you will make money.

It’s those kinds of investing myths that become axiomatic through repetition. You keep hearing the same thing over and over again and pretty soon people believe it.

Let’s look at the data.

It’s true that stock markets have plenty of peaks and troughs. Going back to the last relative peak, the Dow Jones Industrial Average (DJIA) hit just over 14,000 in October 2007; back then this was an all-time high.

If you had bought the DJIA back then, your return on the increase in share prices through today would work out to be a measly 3.5% on an annualized basis.

If you adjust that for taxes and inflation (even using the government’s own monkey numbers for inflation), you’re looking at a real rate of just 1.2%.

Now just think about everything that you saw in the last 7 years. The volatility. The risk. The turmoil.

Was it worth it? Probably not.

But if we go back further and hold an even longer-term view, the picture must brighten, right?

Let’s go to the peak before that. In early 2000, stocks once again reached what back then was an all-time high.

If you had bought the S&P 500 index back then (which is exactly what I was told at precisely the time that I was told), your annualized rate of return through today would be just 2.17%.

If you adjust that number for taxes and inflation, your real rate of return would be a big fat 0.14%… as in less than 1%. It’s practically ZERO.

Think about what you saw over the last 15 years in the markets—the collapse after 9/11, interest rates cut to zero, interest rates ratchet up again, huge swoons in markets, the credit crunch, Lehman’s collapse, the debt ceiling debacle, etc.

Is all that really worth a return of 0.14% per year? (i.e. 14 cents on every $100 invested)

It makes absolutely zero sense to do this with our money. But that’s what we’re forced into right now with most conventional investments at their all-time highs.

Bottom line—you don’t HAVE to be invested in the market. Sometimes the best investment you make is the investment you don’t make.

The challenge is, of course, that if you’re not invested in the market, your money is just sitting at the bank, earning less than the rate of inflation.

Welcome to the world of mainstream financial options. You’re damned if you do and damned if you don’t.

The conclusion here is very simple. It’s time to move on from the mainstream. There’s too much technology and too many global options now to be lulled into conventional investments that are born to lose.

Source: Sovereign Man

[winston]

The Deadliest Investment Myths By Harry S. Dent Jr.

The S&P 500 is struggling to even remain in positive territory this year. It’s on its last legs.

Then in some of the bubbliest cities, magnificent homes are still being built. Homebuyers and investors don’t seem to realize we’ve reached a peak!

Like I’ve said many times before, most investors pile into the markets with everyone else. They don’t get in closer to a market bottom like they should.

Worse, the last few get in after other investors have already picked up the gains. They have a huge misperception of risk. They think, the longer a market has gone up, the less risk there is. But the truth is that the longer and stronger a market’s advance, the more likely it is to go down – and to go down big time!

Think back to the tech bull market from October 1990 to March 2000. It resulted in one of the biggest bubble bursts of all time, with the Nasdaq falling 78%.

The most astute investors (AKA the “smart money”) buy at these times when the markets are down. Meanwhile, most investors shun them out of fear. Big mistake!

In reverse order, the smart money gets out at a market top when the last few investors decide now seems like a good time to pile in. That’s why, when it comes to making investments most Americans think you should, you should actually do the opposite!

This all follows a natural S-Curve pattern. The 0.1% get in first. Then the 1%. Then the 10%. That’s why these people so dominate wealth and income. They’re willing to take more risk. So they pick up the most gains!

Most investors get in somewhere in that 10% to 90% acceleration. Not at the beginning. Hence, what they think and do are not good indicators of the best future trends.

To give you some insight into what most Americans consider the best long-term investments, here’s a recent poll from Gallup, the premier surveyors of American attitudes:

See larger image

Real estate is currently No. 1 at 31%. Except it’s the worst long-term investment by our research!

We’ve built way too many houses, and just don’t have enough people to fill them into the future. Since the Boomers are a larger generation than Generation X which followed, as they retire, downsize, and eventually die, real estate will fall with them. And I doubt it’ll ever reach these heights again.

Just look at Japan. It’s already proven that real estate can go down 60%, and not recover even 24 years after its peak.

Now, I don’t think real estate will drop as much as stocks in the crisis ahead. But the difference here is that most people have mortgages on their real estate, so the falls are more painful! The majority of homeowners who signed a 30-year mortgage today, or even 10 years ago, should not hope to see their investments appreciate. Period.

No. 2 on Gallup’s list are stocks, at 25%.

As I’ve already explained, most investors get into stocks well after they should have, and are too late getting out. Investors have been swooning over stocks as they’ve reached all-time highs… but that just means they have further to fall!

When this BS, artificially Fed-generated recovery finally fails, those investors will be sorry.

If I had to choose, I’d rather buy stocks than real estate right now, as stocks will actually recover after a major crash, even substantially. I can’t say the same for real estate.

Now on to No. 3. Everyone’s favorite metal – gold!

King Gold was at its peak in 2011 at 34% in the poll. Since then, it’s dropped to 19%. Still, it’s beating savings accounts and bonds… which in my mind are clearly superior.

Gold does have some redemption in times of crisis as I explained in Boom & Bust back in May. That could cause it to have a small bump when the next meltdown first hits. But ultimately gold has further to fall, to $750 initially then as far as $250.

That brings us to the last two: savings accounts and bonds.

Though only 15% of Americans name savings accounts as the best long-term investment, that is where investors should be in this unprecedented bubble, at least to a large extent.

Today, investing in a savings account would allow you to preserve your gains, sleep well at night, and have instant liquidity to buy when everything crashes ahead. But for some reason, no one wants cash today!

Although right now instead of savings I’d actually recommend you put your cash in safe short-term bonds – or a money market account in your brokerage account. That’s because banks can lend against a savings or checking account. As things crash ahead and too many loans go bad, banks may simply not have your money when you want it – as happened in the Great Depression!

Bonds come last in the poll at just 6%, and for most people that means safe Treasury or high quality corporate bonds.

Such bonds were the single best investment by far from late 1929 to 1941 — they nearly doubled in value, as stocks and most investments were crucified. These same bonds could be very valuable moving forward through this economic winter season.

To summarize, investors have it totally upside down when it comes to the best long-term investments. It should be: high quality bonds, savings (or money market accounts), gold, stocks, then real estate. Not the other way around.

Don’t follow the collective opinion of the majority of Americans. We tend to think there’s strength in numbers, and we’re biased to follow the crowd. But that doesn’t mean the majority gets it right. And in this case, the majority’s dead wrong.

Source: Economy & Markets

[winston]

Don’t Use Dumbed-Down Rules by Charles Sizemore

Here’s a dirty little secret of the financial planning industry: most financial planning rules are so dumbed down you can’t even use them.

In fact, I would argue they’re downright harmful, and following them might very well cost you your retirement.

Let’s start with perhaps the biggest offender of all: the rule that says your allocation to stocks should equal 100 minus your age. The rest, you should put toward cash and bonds.

Forget it. It’s a terrible rule that completely ignores the fundamentals of investing.

This rule doesn’t so much as consider how relatively cheap or expensive stocks and bonds are.

That’s just basic common sense!

And never mind the fact that there is a broad world of investments completely outside the stock and bond markets.

There’s real estate… options strategies… commodity trading funds… and a whole list of alternatives.

The smart money that manages the Harvard and Yale endowment funds heavily favors alternative investments. Why shouldn’t we follow their lead?

Then there’s this one: the 4% Rule.

The idea here is that 4% is the highest “safe” withdrawal rate that will survive a 30-year retirement without depleting your portfolio.

Under the rule, which became standard planning practice in the 1990s, you take a 4% withdrawal in the first year of retirement and adjust the figure up by the rate of inflation.

There’s one major problem here. The model assumed a 50/50 or 60/40 mix of stocks and bonds, and bond yields were a lot higher in the 1990s.

At current prices, bonds aren’t going to generate enough income to meet the 4% rule. And given that stocks are very expensive right now, that’s a risky move to rely on as well.

So, what’s an investor to do?

To start, you should have an open mind when it comes to choosing asset classes. If traditional assets classes like stocks and bonds are not attractive – welcome to today! – you’ve got to look elsewhere.

It also pays to be flexible in concern to income.

When it comes to paying your bills in retirement, it doesn’t really matter where that dollar comes from. It can be an “income” dollar paid via dividends or interest, or a “capital gains” dollar generated from trading or growth strategies.

Your decision here will have a lot to do with what the market is offering. If you can’t realistically pay your bills given the yields in safe income investments, then creating “synthetic dividends” by trading stocks and options might be your only option.

As a general rule, I prefer to use income dollars for personal expenses to avoid selling shares. If you’re looking to sell long-term, buy-and-hold investments, you can really get yourself into a mess.

And in a prolonged bear market, selling your shares can be akin to a farmer eating his seed capital. Shares sold at depressed prices are shares that won’t grow in value when the market turns around.

But this doesn’t mean I buy overpriced income securities just for the income, either.

In the end, you should invest where you believe you can earn the best return. And if that means a larger allocation than usual to shorter-term trading strategies, so be it.

Source: Economy & Markets

[winston]

5 Investing Myths That Will Hurt You

By Lance Roberts

Source: Talk Markets

http://www.talkmarkets.com/content/us-m ... m=referral

[winston]

'Sell in May' and other investing adages debunked

by Matt Krantz

Source: USA TODAY

http://www.usatoday.com/story/money/mar ... yptr=yahoo

[winston]

The Five Biggest Stock Market Myths

The Bottom Line

Forgive us for ending with more investing clichés, but there's another old adage worth repeating:
"What's obvious is obviously wrong."

This means that knowing a little bit will only have you following the crowd like a lemming.

Like anything worth anything, successful investing takes hard work and effort. Think of a partially informed investor as a partially informed surgeon; the mistakes could be severely injurious to your financial health.

Source: Investopedia

http://www.investopedia.com/articles/02 ... z4GcJHVQdm

[winston]

Don't Be Blind to Alternative Histories

by Vishal Khandelwal

Nassim Taleb writes in Fooled by Randomness -
…one cannot judge a performance in any given field (war, politics, medicine, investments) by the results, but by the costs of the alternative (i.e., if history played out in a different way).

Such substitute courses of events are called alternative histories.

Clearly, the quality of a decision cannot be solely judged based on its outcome, but such a point seems to be voiced only by people who fail (those who succeed attribute their success to the quality of their decision).

We are blind to alternative histories - those silent events that could have happened but didn't.

In the language of behavioural finance, this irrationality is known as Survivorship Bias. The outcome which is visible, 'survived' and the ones which didn't survive are hidden.

As Taleb writes :-

Imagine an eccentric (and bored) tycoon offering you $10 million to play Russian roulette, i.e., to put a revolver containing one bullet in the six available chambers to your head and pull the trigger.

Each realization would count as one history, for a total of six possible histories of equal probabilities.

Five out of these six histories would lead to enrichment; one would lead to a statistic, that is, an obituary with an embarrassing (but certainly original) cause of death.

The problem is that only one of the histories is observed in reality; and the winner of $10 million would elicit the admiration and praise of some fatuous journalist (the very same ones who unconditionally admire the Forbes 500 billionaires).

Like almost every executive I have encountered during an eighteen-year career on Wall Street (the role of such executives in my view being no more than a judge of results delivered in a random manner), the public observes the external signs of wealth without even having a glimpse at the source.

Consider the possibility that the Russian roulette winner would be used as a role model by his family, friends, and neighbors.

In effect, the general belief is that if the outcome is good, the process and decisions made to arrive at that outcome must have been sound.

Alas, life doesn't follow such straight patterns. The randomness and 'external factors' play a defining role in life and investing.

Source: Seeking Alpha