The first time I took a look at the market it was so ugly and I held on to my wallet tight. Ah then I met my finance guru, Mr. Feldstein, and he came in as an expert mutual fund manager. He coaxed me to take another look at the market. With him breathing down my neck I knew he would protect me from drastic losses. It was then.
Mr. Feldstein, If Capitalism promised you unlimited credit for your supposedly savvy wheeling and dealing just think where you have landed. Think you have me also landed in this mess. Why? I thought I could just lean on a little since I had no Midas touch as you seemed to have. Now it looks as if that touch was somewhat overblown: you had your finger in the wallet of so many suckers and the golden touch was nothing but fool’s gold. At the end of your gold you got me, that is all.
Having blown away a piece of the pie in the sky I thought hard.
Here are 10 myths we need to dispel. These were truisms that no longer hold water.
MYTH 1: We can invest safely abroad where there must be some hot spot. Here at home losses are mounting and there are emerging markets works on the premise’ the grass is often greener elsewhere.’ Net investment money flowing into emerging-market economies fell 50% in 2008, to $466 billion, and is forecast to sink to $165 billion in 2009.
Truth: In this age of globalization, economic downturns and bear markets observe no borders.
Another variant to this myth is that we haven’t sunk as low as some other market say China or Iceland. Don’t count on it. What is blowing there isn’t an ill wind that will spare you.
MYTH 2: Real estate behaves differently from other investments. Rental properties or real estate investment trusts can make money despite drops in Standard & Poor’s 500-stock index or the Nasdaq. Wrong. REITs lost 38% in 2008 because the credit crunch and overly aggressive expansion plans hammered profits and dividends. REIT returns used to have little correlation with the stock market. Now they closely track it.
Truth: Real estate won’t overcome other risks when credit problems are harming all investments.
MYTH 3. Reliable dividend payers are safer than other stocks. Those companies recognized as dividend “achievers” or “aristocrats” depended on shareholders who have now become volatile. More mass trading and quick profits have given these shareholders a taste for not settling for slow but steady dividends. Another factor: Banks, insurance firms and real estate companies can no longer afford to pay high dividends.
Truth: Learn to move with the times. If you want stable dividends, ignore the past and look for companies with lots of cash flow.
MYTH 4. Foreign creditors can drain the U.S. Treasury overnight. Puny Treasury yields suggest that it’s bad business for the rest of the world to lend so much money to the U.S. Foreigners own $3.1 trillion of Treasury debt. Of that, $1.1 trillion is with private investors — mainly pension funds, which cannot safely ignore a class of investment that is absolutely liquid and has never defaulted. Governments and institutional investors hold the rest. On occasion they have sold more U.S. debt than they have bought. But massive private buying has overwhelmed the modest pullbacks.
Truth: If what you want is super-safe bonds, the U.S. Treasury is the go-to place.
MYTH 5. Gold is the best place to hide in a lousy economy. In early February, an ounce of gold traded for $910. That’s just where it sat a year ago, when world economies weren’t so bad off. But gold does not typically benefit from a recession. As inflation slows, people buy less jewelry, industry uses less gold, and strapped governments sell reserves to raise cash.
Truth: Gold tends to rally in prosperous times, when you have inflation, easy credit and flush buyers (kind of reminds you of real estate. . . ).
MYTH 6. Life insurance is not a good investment. This canard spread as 401(k)s and IRAs supplanted cash-value life insurance as Americans’ most popular ways to build savings while deferring taxes. True, the investment side of an insurance policy has higher built-in expenses than mutual funds do. But two factors point to a revival of insurance as an investment. One is guaranteed-interest credits on cash values, which means that if you pay the premiums, you cannot lose money unless the insurance company fails .The other is the boom in life settlements. If you’re older than 65, you can often sell the insurance contract to a third party for several times its cash value — and pay taxes on the difference at low capital-gains rates.
Truth: A good investment is one in which you put money away now and have more later. Checked your 401(k) lately?
MYTH 7. The economic downturn dooms the dollar to irrelevance. No question, the U.S. is deep in debt and going deeper while the economy contracts. History teaches that when a country can’t pay its bills, lags economically and cannot control inflation, its currency loses value. That’s why currencies in Argentina, Iceland, Mexico and Russia have all crashed within recent memory.
Truth: The dollar has survived a tough test and remains the world’s “reserve” currency.
MYTH 8. Mass layoffs reward investors. In the 1990s, news of layoffs would boost a company’s stock for several weeks. Stock traders lauded bosses for tightening their belts, so it was smart to buy or hold the shares. But mass firings no longer impress investors. Lately, firms as varied as Allstate, Boeing, Caterpillar, Dell, Macy’s, Mattel and Starbucks have all announced enormous layoffs — only to learn that, if anything, doing so spooks the market even more. For example, on the day in January when Allstate axed 1,000 of its 70,000 employees, its shares fell 21%.
Truth: Don’t buy a stock thinking that a layoff will help profits. More likely, trouble’s brewing.
MYTH 9. It’s crucial to diversify a stock portfolio by investing style. Experts say a sound fund portfolio fills all “style boxes,” starting with growth and value. Growth refers to companies with expanding sales and profits. Value describes stocks selling for less than the business is worth. In 1998 and 1999, growth stocks soared and value stocks stalled. Then, for a few years, value rose while growth got crushed. But since 2005, the differences have been melting away. In the current bear market, both styles have been disastrous, and it’s hard even to classify stocks as growth or value anymore. Many former growth stocks, such as technology companies, are so cheap that they act like value shares. Banks and real estate, once lumped into value, are a mess.
Truth: Pick mutual funds that are free to search for good prices on stocks, whatever their labels.
MYTH 10. A near-perfect credit score will get you the best loan rate. Before the credit bust, if you could fog a mirror, you could get a mortgage. You know what happened next. But bankers still need to make a buck, so it sounds logical that if you can show a strong credit score, you’ll win the best of deals on any kind of loan. Not so. Mortgage lenders prefer large down payments. Credit-card issuers are just as apt to reduce your credit line or raise your interest rate. And those 0% car loans? Often they last for only three years, which puts the payments so high you’ll need to come up with more upfront cash anyway.
Truth: Credit is going to be tough to get for a while no matter what. So don’t obsess over every few points of your FICO score.
( ack: 10 Financial Myths Busted
by Jeffrey R. Kosnett
Friday, March 13, 2009 Copyrighted, Kiplinger Washington Editors, Inc.)