“Numbers never lie, after all; they simply tell different stories depending on the math of the...
Myth Busters: Five Myths of Investing
I’m introducing a new series today called Wealth Management Myths. The first of the series will be regarding investments.
Here are 5 myths regarding the investment world:
- There is a risk-free investment paying more than the risk-free rate. You know, the 8% guaranteed, risk-free investment when the 3-month treasury rate is at 2%. Risk equals reward. If that rule was understood by all just think how many scams would be stopped before they even got started. It is a simple rule; you start with the 3-month U.S. Treasury Bill which is used as the risk-free rate for U.S. based investors. If it pays more than that, it includes risk. The risk could be credit default, liquidity, inflation risk or a host of other types of risk. Risk equals reward. Also see Rate Your Risk.
- Diversification automatically means lower returns. It depends on how you define return. Is one looking at gross returns or risk adjusted returns? Recall Myth #1. If you are chasing returns, historically small cap stocks have provided the highest returns among major asset classes of stocks (*). Why don’t people just put all their money in small caps stocks? Because small caps also have the most volatility (*). A properly diversified portfolio seeks to provide the best risk adjusted returns long-term. Risk adjusted return matters.
- Absolute statements regarding any particular investment or investment strategy. The only absolute in investing is that there are no absolutes. The media is known for making bold claims that certain investments are horrible or great. Or a certain strategy doesn’t work anymore until it works again. Every investment has its place. Every investment is not a fit for every person. There are no absolutes.
- “This time is different.” In my opinion, the four worst words in investing. Recall the stock market bubble in 1999 when some stated it was the “new economy?” Or how about in the real estate bubble of 2006 when I heard “this time is different (in regards to valuations) because real estate is now an asset class.” The markets historically revert back to the mean over time. This time is not different.
- Passive investing is best. Please see rule # 3. Some years passive investing does better and some years active investing does better. From 1985 to 2017 there was no clear winner between active and passive styles. From 2000 to 2009, active investing outperformed 9 out of 10 years. From 2009 to 2018, passive outperformed active 8 out of 10 years (**). Having both passive and active styles captures both.
I would love to talk to you about any of these, if you have any questions please feel free to call or email me so we can discuss.
*source: Morningstar “Fundamentals for Investors.”
** source: Hartford Funds “The cyclical nature of passive and active investment.”
The opinions voice in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult me prior to investing. Any performance referenced is historical and is no guarantee of future results. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. U.S. Treasuries such as Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.