Greenhorn investors who follow rules of thumb for investing are getting fleeced more often than not.
Statistically you would be mistaken to “sell in May and go away”. Or to think “bonds are safer than stocks” or to “trust your gut.”
Investment manager and columnist Ken Fisher lampoons these and dozens of other myths in a new book, Debunkery: Learn It, Do It and Profit from It – Seeing Through Wall Street’s Money-Killing Myths.
Sell in May and go away is touted in the stock market, backed by the belief that the period from May to November is marked by weak growth. Yet Fisher debunks the myth by citing returns of the S&P 500 from December 31,1925 to December 31, 2009 and finding that June, July and August average at 4.51%, the strongest average of any three consecutive months.
The saying comes from the British 'sell in May and go away, stay away till St. Leger Day'.
People assume bonds circumvent short-term volatility because they are bought at fixed prices which investors will see when the bond matures. In the book Fisher argues that accepting lower returns on bonds in the long-run may not be safe after all. The money could possibly not match your lifestyle in the future, especially during periods of inflation.
He shows how historically stocks have more positive periods that are bigger, than bonds.
Investors stay up nights because of market wiggles but forget that upside volatility is also volatility. Fisher thinks these investors should focus on long-term results instead of short-term survival. Considering long-term agenda, he also points to investors trust of bonds over stocks. Average total returns for for US stocks over 20-year rolling periods was 909% and US bonds was 247%. Whereas the average total returns of US stocks was 239% and US bonds was 262% over 20-year rolling periods when bonds outperformed stocks. Being antsy and sticking with stocks may be the way to go.
Actually, don't says Fisher. Investors who have done well on a gut feeling he points out tend to have very selective memory and forget the times they trusted their gut and lost out on their stocks, the tendency to believe they knew all along comes from hindsight. He describes a myopic loss aversion in which investors will be willing to suffer losses on future returns because they are too terrified to ride out near-term falls.
Accept that you will get extreme returns and chances are you won't be swindled by a con artist. Using Madoff as an example of an investor who said he got 10 - 12% (average) returns every year, Fisher cites statistics from the Global Financial Data Inc., tracing returns on the S&P 500 from December 31, 1925 to December 31, 2009 and finds that investors saw big returns 38.1% per cent of the time, average returns 33.3% of the time and negative returns 28.6% of the time.
Traditionally investors use age to determine the per cent of their portfolio to keep in stocks and suggest deducting your age from 100 to determine the per cent of your portfolio. If you're 25, then you should have 75% of your portfolio in stocks but Fisher doesn't think age should be the sole determining factor when people have different financial needs. The three benchmark he suggests focusing on are time horizon, return expectations and cash flow needs.
Capital preservation and growth cannot co-exist according to Fisher. Even US Treasuries lose value and clinging to these till they reach maturity will not yield much, he points out that 10-year Treasury rates as of 2010 stand at 3% and that the slightest switch in inflation rates could wipe that out. Mostly he says if you want growth you have to accept risk in the exchange rate of currencies.
Low price-to-earnings do not mean low risk for single stocks or the market to Fisher. He references S&P 500's P/E at the end of 2008 which stood at 60.7 and pointed that out that those who looked at the high P/E as an indicator of risk and kept away lost out on a 27% increase in the US stock market.
Stocks won't keep falling forever, given the sheer losses you can incur in a major bear market, Fisher calls it The Great Humiliator. 'The bigger the bear market decline, the bigger the subsequent bull market,' he writes. So, chin-up and look at your long-term goals.
...Not quite according to Fisher, who finds that risk is actually lowest when the bear market looks most bleak and that's the perfect time to stock up because the bull market's initial growth will be aggressive. The only hitch? the odds of predicting a bear market bottom are rarely in your favour. Either way don't miss the start of a bull market.
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