Nearly two years ago, I received a call from a former college friend of mine. This was about the time the market was starting to recover from its drastic downturn in the fall of 2008, leaving many investors shaking their heads, selling off and vowing never to return to the Dow Jones again. During the phone conversation with my friend, he breathed a sigh of relief that he had thankfully moved money over into bonds and commodities. I was a bit stunned by this, as my friend had gone through the same economics and banking studies that I had. But with all due respect, I could hardly blame him. It was a time when the drumbeat of market naysayers was loud. Fear abounded as savers withheld contributions from tax-favored retirement plans, sold equity funds and stocks at rock-bottom prices and reinvested the money into “safe” bond funds, gold and the like.
Though my confidence was shaken, I was not stirred to act – no running with the bond crowd, no mining for gold. Instead, I was determined to buy ownership in good companies and brace myself for whatever animal invasion would occur…either running with the bulls or getting eaten by the bears.
Now, in January 2011, the bulls have it. As columnist Will Deener writes in Bull Market Runs Past Hestitating Investors (Dallas Morning News, January 2), “…most small investors missed one of the greatest bull runs in Wall Street history.” He points out that the Dow Jones gained 77 percent since March 2009, which is more than the average bull market gain of 50 percent over the same time period.
It is time to put away the myths about investing that leave people to panic, make rush decisions and move money in the first place. While the recession has triggered worry and uncertainty, this is not the stock market of the Great Depression. Investment strategies that are oft-repeated by previous generations may no longer be effective in today’s climate. Here are a few:
Myth 1: A guaranteed rate of return is always the best choice. This is not so if the guaranteed rate of return will not keep up with inflation. And yes, inflation will happen again
Myth 2: Retirees should always play it safe. Nothing is “safe.” The idea that a 65-year old must stop looking at equities and instead settle on a mediocre rate of return is simply outdated. While having a guaranteed annuity puts food on the table, bear in mind there is a reason that annuity products are pushed so heavily – financial planners make money off of them. Always look at other options, including your ability to self-invest and make programmed withdrawals each year.
Myth 3: It takes too much money to invest. If you are a young worker and truly believe this, you need to talk to a few people who were given stock options while working a part-time job in college and did not take advantage of them. I have spoken to many Baby Boomers who were given the opportunity to purchase stock for pennies on the dollar in their younger years, and they now regret not having done so. They passed up thousands, potentially hundreds of thousands of dollars. No matter how young you are, start saving, be it $25, $50 or $100 a month more. Take advantage of every tax-deferred account, and give serious consideration when working for any company that offers stock options.
Myth 4: The market can be timed. Whoever is telling anybody that one can “time the market” is probably selling beachfront property in Phoenix. The market can never be timed; this is what usually brings people to sell when the market is falling (bad idea) and buy when the market is rising (another bad idea). Bottom line is: If a company stock looks good (little or no debt, good growth potential, etc.), buy it. If an equity fund looks good, buy it. Simple as that. If the market falls, look and see what is out there to buy. And there are good reasons to sell stock, but the day a company stock falls 50 percent is not the best day to sell.
Let 2011 be a year for common sense investing!