Myths in Stock Market Advice - Part 2
Myths in Stock Market Advice – Part 2
DISCLAIMER - I am not a Financial Advisor and do not work for any Brokerage Firm. The opinions given are my own and are not to be used as professional advice. These are my findings and can hopefully help you make informed investing decisions. Consult a Broker or Lawyer before making any investment.
Those of you who have been following my blog and articles for several months, know my reason for doing this is to share some of my findings in investing in the stock market. I want to help everyone to make good solid decisions when it comes to investing. My first 40 articles have been tied to things that have worked for me or promising new things I am trying this year. The reality of the situation is that I can only share what I know to be the truth.
I wrote my first article on myths last week. I want to continue on that first topic today and again document some of my findings from the 3 books I mentioned in that first article. I may write several articles on Myths as I keep finding more and more fallacies in stock market advice. A lot of unscrupulous people are taking advantage of the uneducated.
To read article one on myths, click below:
MYTHS IN STOCK MARKET ADVICE
Last week we started with the fallacy of believing in an average 12% annual return in the stock market, and I want to elaborate on this topic a bit more this week. A lot of people teach that the stock market will average out to a 12% annual return so don’t have to worry about where you invest, just invest it consistently, and it will work out.
This is so prevalent a teaching that even I have been guilty of using this to encourage people to “Just Invest” no matter the market. I can’t overemphasize the importance of knowing the market and knowing WHAT to buy and what to avoid.
In the book “Stop Investing Like They Tell You” by Stephen Spicer, a CFP (Certified Financial Planner), he points out the fallacy of believing the S&P 500 will always average a 12% annual return. Note: On this next image, you can read this better in a browser than on your phone.
So many teach that by simply adding to your investments each week, by the use of dollar cost averaging everything will work out fine in the long haul. Now if you are in a mutual fund that is a ‘Target Date Fund’ set to the year you will retire, there might be some logic to this approach. But simple ETF investing in full stock market indexes is not enough.
The reason that dollar cost averaging sounds so good is that you get more shares when stocks go down and fewer as the prices increase. The kicker is that just because the stock market did average that 12% over the past 50 years, you must question if that will repeat itself.
History does tend to repeat itself, but do you want your retirement funds based on a ‘Maybe it will approach?’ Will you be able to invest and leave the money alone for 50 years? I doubt any of us will ever invest in the same investment for 50 years.
That 12% per year average sure sounds good. I mean who would not like that? Unfortunately, there were several 10-year periods in the last 50 years where the average was less than 3.5% average annual return. And twice there were ten-year periods showed a negative return. If you are like me at an older age, you can not afford a negative return.
The reality is we all best assess our situation based on our age and projected retirement date, and as we get near retirement, get super conservative.
Warren Buffet said his number one rule was “Don’t lose money in the stock market.” And Rule 2 is don’t forget number 1.
There are a few safe investments, but there are many that can lose money. Most people think you can quickly regain a 30% loss. Not so. The reason is you lost 30% of your base investment, so it takes more like a 43% gain to make up for a 30% loss. Look at the graph below to show what losses require to just break even.
So if you lose ½ of your money, now to break even, you must have a 100% return. How many of you ever made a 100% return in your IRA or 401K? I have been investing for 30 years, and I think my best year ever was 22%.
So our number one goal should be to never lose money. Not easy when you are trying for above-average gains, but there are logical ways to proceed cautiously.
My new goal is to limit all stocks and ETFs to an 8% loss by using stop-loss orders. After we hit a bottom in the market, I buy back in, sometimes on the same stock or ETF. But I try to not ride out a 25 to 40% down market. It is extremely hard to ever overcome. And there will be some upcoming myth articles about when the market did much worse than lose 40% in one day (more than once).
Using this stop loss orders method for the last 4 months, my wife and I now have an overall gain of around 3% on all five of our Roth IRAs for the year. That is so much better than the current 26% loss in the S&P 500. While my new Dividend Growth Stock approach is unproven, the majority of those stocks are in my Schwab account which is up 8.6% for the year. At Vanguard where we are primarily in full stock market indexes and real estate (REITs) and ETFs on Dividend Growth Stocks, we are up 6.8%.
Our two Wealthfront IRAs are managed by Wealthfront, and both are about 1% up for the year. These are heavily conservative with balanced investments in all markets and some foreign bonds and foreign stocks.
So as far as the advice to never bother or consider the markets, I think we know that is bad advice. I am not advocating not putting money into investments in down markets, but I am advocating placing new money to Savings accounts, Bonds, CDs, Tips, and I-bonds until the market downturns bottom out.
Capital One 360 Savings have high-velocity savings paying 3% per month and Discover Savings is also paying 3%. I saw today that Credit Karma has a savings account paying 3.3%, but have not researched it. I purchased a six-year CD in my Fidelity Roth IRA this week which is paying 5.05% and 4 year one paying 4.8% that is not callable. Conservative options abound during this bear market as we face the possible 2023 recession.
A Few More Myths:
The United States has the highest tax rates in the world. Not true!
Mutual fund myth: Don’t worry about low one or two-percent fees on Mutual Funds. False again. Just a one percent fee can reduce your long-term return up to 28%. A two percent fee can lower your long-term return by as much as 63%. Fees matter.
Another hot tip myth:
When things take off on whatever is hot now, jump in without regard to verifying the value of the investment. Extremely stupid advice. History is full of “The Greater Fool” stories where euphoria takes hold and cost does not seem to matter to investors. Cost and value ALWAYS matter. I think Amazon’s P/E ratio is far from 8 to 1 as is desired. I think I read it is more like 1400 to 1. Does that make it a bad investment? Sounds risky to me, but many people got rich buying Amazon when it started. But now is not then.
Warren Buffet warns to “Be Fearful when others are greedy, and greedy when others are fearful.”
The key to this advice is to buy when prices are down and the market is stabilized. Then when the market is high, consider selling when the stock or ETF has exceeded a fair value. I personally try to minimize buying and selling, but huge gains sometimes are a good time to at least recover your initial investment. High prices typically do not last forever.
Myth: Financial independence and the ability to retire early (FIRE) is easy to obtain.
Financial Independence means you are earning enough that your investments are making more than your annual costs in perpetuity.
The reality is this is very hard to accomplish. You can not expect an average of 12% per year, and you may not average 8% per year. If you need $50,000 of income yearly, you must accumulate $700,000 (or more) to sustain your retirement expenses based on an 8% return which is never for sure.
So take these findings and learn to make better decisions. Keep reading and studying on your own. I will do another Myths article in the upcoming month. If you are a serious investor, be sure to read the 3 books I mentioned in the first article which is below.
List of All Investment Articles https://lifecanbesimple.net/investments.html
List of All Minimalism Articles https://lifecanbesimple.net/minimalism.html
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