Investing Facts You Should Know-

But Chances Are You Don’t

                                By: Brendan Magee, Dec. 2010

More times than I can count, I often read or hear statements made about the stock market and investing, and as time eventually proves those statements telling us the way things are,  prove to be not the way things are. I read an article written in the New York Times by securities fraud attorney and author Dan Solin. The article is entitled, Ten Things You Should Know About investing-But Probably Don’t, and it is a good example of statements or widely held views about investing that are proven to be untrue.

The first, is a statement I have heard countless times over the past decade, “This has been the lost decade for stocks.” The basis of such a statement is the S&P 500, and yes if we focused on the impact of the bear markets of 2000 to 2002 and 2008 looking solely at U.S. Large Co. stocks that statement appears to be true. It’s not true if we look at a portfolio made up of 60% stocks and 40% bonds which is the allocation of most defined benefit pension funds. That portfolio mix over the last decade did an annualized six percent. A portfolio of 100% stocks globally diversified over the past decade had an annualized rate of return of eight percent. Both of these portfolios produced returns high enough to outpace the rising cost of living and were a lot more satisfying than C.D.’s or money market funds.

Now these portfolios might not be the right mix for everyone, but why someone would make a statement using only the S&P 500 as the basis to make a statement about all stock s is hard to fathom. My question is what about all those investors who believed in such statements, saw their investment balances go down, then  pulled their money out of equities all together, and made the impact of their losses permanent? Where do they go for restitution? The person who made that statement is long gone.

Another absolute statement is: “Great Companies Make Great Investments.” Bear Stearns, General Motors, Lehman Brothers, IGA. The list could go on forever of companies believed to be great, but if you had a significant amount of money in them recently you unfortunately know that great doesn’t mean infallible.

What also doesn’t get conveyed to investors is that owning these great companies on an individual basis means the investor has assumed two to three times more risk than if they owned them in an index. For some the additional risk wouldn’t be so bad if it meant a higher expected rate of return, but one stock has no more higher expected return than all of those that would make up its index.

Here’s another, “Mutual Fund Performance Is Based On Fund Managers Skill, Not Luck.” 2,100 funds were recently researched. They did have superior five year track records, but there was no evidence that superior returns could be attributed to anything more than luck.

This is not what the mutual fund companies  want investors to believe when they publish their funds’ stellar track records. They want investors to believe they got a skill and insights that no one else has. The real skill here isn’t knowing which funds did the best over the last 20, 10, or five years, it’s knowing which are a going to produce superior rates of return over the next 20, 10, or five years. If track records were based on skill, the same funds would consistently appear on the top performers list. Studies show that every year about a third of the funds will outperform its index. Unfortunately, that top third keeps changing every year, and studies show that none of the funds outperform its index over a ten year period of time.

You probably can deduce that you’d be better off going for the return of the index which is available at a third to half of its actively managed funds, but the mutual fund companies don’t want to let you know that.

The lesson here is, if anyone is making absolute statements about the stock market in terms of how it is or will be performing run do not walk in the opposite direction.

This is just a portion of the article published in the New YorK Times. If you’d like to read the rest of the article send me an email and I’ll e-mail it to you along with access to all the studies used.

Brendan Magee is an Investor Coach. He is the founder and president of Inevitable Wealth Coaching in Drexel Hill, Pa. If you have questions, comments, or suggestions call 610-446-4322 or send an e-mail to Brendan@coachgee.com. You can also listen his radio show, The Investor Coach’s Show on am1340 WHAT. You can also listen over the web at www.am1340what.com.