Investing for Survival

With the most recent market rally from the March 2009 Dow Jones Industrial Average low of 6,547 to the recent eclipse of 15,000, Investors are beginning to bring back all the old Wall Street myths that just won't die.

If you’re saving for retirement, you would be wise to ignore these long-held canards:

Myth No. 1: The stock market averages 10% annually over time

Investors have been conditioned by the news media, financial commentators and some fund families that if they stay invested over long periods of time; they should expect to average about 10% growth in the stock market.

Sure, there have been times where the stock market, based on the Standard & Poor’s 500 Index SPX -0.48% ,  did average 10% or higher. We can think of the 90s, where the market did go up very nicely for many years. But conversely, we can look back and see that from 1964-1982, the market average basically went sideways for 18 years. No 10% per year growth there.

No one should really expect to consistently earn 10% per year in the stock market. Just buying and holding and hoping for 10%, could be dangerous.

Myth No. 2: Find the best track record

With the popularity of investing information websites, researching and analyzing investments can be very easy. The most common mistake I see investors make, is just searching for what has the highest track record. Basically choosing their investments on what ever theme is in vogue. This is probably the easiest mistake to make.

Why choose an investment that has recently not done well? Diversifying your investments, would require you to invest in some asset classes that are not going up right now and some that may be doing very well. In your allocation, you want to strive for assets that are not perfectly correlated so if some are going down, others may be going up.

Myth No. 3: Investing risk goes down over time

Investing always involves risk and whether you have been investing for one year or 30 years, the risk of loss is still the same. The longer you invest, does not mean the risk of loss declines. You may even have more money at risk, if your investments have grown over time. If stocks always went up, the cost of hedging a portfolio against the risk free rate would decline over time. But it doesn't.

Stephen Lomsdalen