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Does it seem like the financial world is upside down these days? It may seem as though the same things you used to do just don’t work that well any longer. At times like this, most retail brokers offer familiar wisdom and advice that just isn't relevant in today’s world. Here are a few that need more scrutiny:
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The 10Myths ofModernInvesting
By: 7 Tax Traps
1“This is agood timeto investin thestockmarket.”
Wow, now that’ssurprising to hear fromsomeone who makes
money by sellingfinancial products! Sort
of like asking thebarber if you need ahaircut, eh? Ask the
broker when it was thathe warned clients that
it was a bad time toinvest. October 2007?
February 2000?
2“Stocks onaveragemake youabout 10%a year.”
Old news and numbers.The decades of the 80’sand 90’s saw averagereturns in excess of
12%. The last 50 years’average is (arguably)
6-7%. Based oncurrent valuations, wewill likely see returns
in the 4-5% range overthe next decade ofretirement. Which
number do you want todepend on?
3
“Oureconomists areforecasting…”
The brokeragecommunity and ‘1-800’boys love to brag about
their highly paideconomists. Ask them
if the firm’seconomists predicted
the most recentrecession – and if so,
when? The track recordof most economic
forecasters is prettypoor. Their comments
are typically loadedwith a lot of ‘outs’ in
case they are wrong. Ifthe big boy’s
economists are sosmart, why have somany of their firms’clients lost so much
wealth? Hmmm.
4“Stock marketinvestments letyou cash in oneconomicgrowth.”
The Japanese havefound that NOT to betrue. Their economy
has grown 25% in thelast twenty years, yet
their stock market hasfallen 75%. Or how
about your Wall Streetinvestments that you
made in 2000? Theeconomy has grown,yet your investments
are likely down.
5
“If you wanthigher returns,you have to takemore risk.”
The only way to earnhigher returns is tobuy stocks that are
inexpensive relative totheir future cash flows.
Over the lasttwenty-five years, the
FactSet Researchutilities index has out-performed the Nasdaq
index of smallcompanies. Risk is notjust volatility; it is thereal chance you’ll lose
principal.
6
“Stocks arecheap now, witha Price/Earningsratio of ‘x’…”
This is a favorite of theold guard; it makes
them sound so smartand market savvy.
However, the truth isthat by many
measurements, P/Eincluded, stocks areactually still pretty
expensive relative toearnings potential.
7
“You can’t timethe market.”
Most often, thebrokerage world relieson this mantra as an
excuse for NOT payingattention to yourinvestments. Pay
attention to wheremoney is being made
in the various markets.Move to where thegrowth is actually
occurring; it ismeasurable and
identifiable if someonewill put some energy
into actually managingyour investments.
8
“We recommendthat you diversifyacross many mutualfund groups.”
Most often, thebrokerage world relieson this mantra as an
excuse for NOT payingattention to yourinvestments. Pay
attention to wheremoney is being made
in the various markets.Move to where thegrowth is actually
occurring; it ismeasurable and
identifiable if someonewill put some energy
into actually managingyour investments.
9
“This is a stockpicker’s market.”
Aren’t they all? Yetmost stock pickers,individual or broker,
consistently losemoney. Most of your
returns will come frombeing in the right assetgroup, and by havingenough money in that
group to actually makea difference.
10
“Stocksoutperform overthe long term.”
How broad a statementis that? How long is long
term? Does that evenapply to your
investment andretirement objectives?
“Crazy horselesscarriages, they’ll nevercatch on!” “Computersmaybe have a worlddemand of five.” And
now you have anotherten statements that
sounded right, but withtime and experience
have been proven reallywrong.
Maybe it’s time to makea few changes.
11
Want tolearn more?
Visit us atwww.7taxtraps.com (or
click this box)
Learn about:
The biggest mistakesbefore retirement.
Tips to minimize the
sting of taxes.
Strategies to maximizeyour retirement
income.