The Truth About Investing Myths

11/03/2010 4:04 pm EST


John Heinzl

Reporter and Columnist,

Most investing rules of thumb are nothing but useless myths, says reporter and columnist John Heinzl.

When it comes to investing, people love simple axioms. “Sell in May and go away,” for instance. Or, “As January goes, so goes the rest of the year.”

There’s only one problem with these and other investing rules of thumb: Most are nothing but useless myths, according to a new book by US investing columnist and money manager Ken Fisher.

Equally suspect is the notion that bonds are safer than stocks, that high unemployment is bad for the market, and that gold is a great long-term investment, Mr. Fisher writes in Debunkery: Learn it, Do it, and Profit from it—Seeing Through Wall Street’s Money-Killing Myths.

It’s about time someone drove a stake into the folklore that permeates Wall Street, and Mr. Fisher does it in convincing—and often entertaining—fashion.

Here at Investor Clinic, we believe that a healthy dose of skepticism is an essential part of a well-rounded investing strategy. So today we’ll look at some common investing myths.

MYTH: “Sell in May …”

FACT: If you sold the S&P/TSX composite on May 1 of 2009 and bought back on November 1, as the rule advises, you would have missed a gain of 16.6 percent. If you sold in May of 2010, you would have forfeited a gain of 5.2 percent. Plus, you would have paid transaction costs and possibly taxes.

In fact, the summer isn’t lousy for stocks at all. According to Mr. Fisher, June, July, and August together have posted an average gain of 4.51 percent for the S&P 500 since 1926—better than any other three consecutive months.

While it’s true that May-through-October (up 4.26 percent) has done worse than November-through-April (up 7.07 percent), it’s also true that March-through-August (up 7.16 percent) has beaten September-through-February (up 4.38 percent).

“So why not ‘sell in September?’” he asks. “Probably because it doesn’t rhyme with the ‘and go away’ bit.”

MYTH: “As January goes …”

FACT: The stock market has far more winning years than losing ones. Since 1926, the S&P 500 has gained in 60 of 84 years, for a winning record of 71.4 percent. So of course when the market rises in January, it also has a high probability of rising for the full year. That’s what stocks generally do—rise.

What about when the market falls in January? It’s happened 31 times since 1926, and in 15 of those instances stocks finished the year higher, while in the other 16 they finished lower. In other words, it’s basically a coin toss.

“So ignore January. So goes January is how January goes, and then it’s gone—and nothing more,” he says.

MYTH: Bonds are safer than stocks.

FACT: If your idea of safety is avoiding short-term volatility, then bonds are for you. But if you’re seeking the safety of watching your money grow over the long term, then bonds—which pay a fixed interest rate—are actually much riskier than stocks. What’s more, regular bonds offer no protection from the ravages of inflation.

Mr. Fisher examined the 54 rolling 30-year periods since 1927, and found that stocks were the overwhelming winner over bonds in every period. Stocks also came out on top in 62 of the 64 rolling 20-year periods. The short-term volatility of stocks is the price investors pay for their superior long-term returns.

MYTH: High unemployment is bad for stocks.

FACT: While losing one’s job is traumatic, a high level of unemployment doesn’t necessarily mean the stock market will suffer. In 2009, for instance, US unemployment climbed above 10 percent, but the S&P 500 leaped 26.5 percent.

This wasn’t an aberration. Typically, the stock market bottoms before the recession ends, but unemployment keeps rising even after the recovery has started. That’s because employers don’t start hiring again until they see clear signs that the economy is back in growth mode.

Because the stock market is often a leading indicator, “If you wait for confirmation from falling unemployment to buy stocks, you can really miss out,” Mr. Fisher says.

MYTH: Gold is a safe harbor.

FACT: Like other commodities, gold is prone to violent boom-bust cycles. Anyone who bought gold when it surged to more than $800 (US) an ounce in 1980 was rewarded with a bear market lasting about two decades. And while the metal has been hitting new nominal highs, on an inflation-adjusted basis it’s still well back of its 1980 peak.

Could another gold bust happen? Absolutely, Mr. Fisher says.

“Amazingly, many normal people who never, ever would think they could time the stock market, bond market, pork bellies or currencies are content to own gold thinking it is ‘safe’,” he says. “There’s nothing inherently special about this metal making it immune to losses. Gold as a safe harbor is bunk. Sometimes it rises. Sometimes it falls.”

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