4 million-dollar investing myths you need to stop believing
From: www.marketwatch.com
Don’t cheat yourself out of long-term returns
I’m continually amazed at the investment misconceptions that lure people into cheating themselves out of long-term returns.
Some are little more than plausible-sounding rules of thumb passed from person to person without much careful thinking taking place.
Let’s look “under the hood” at four examples.
These million-dollar investing myths prompt investors to effectively rob themselves of hundreds of millions of dollars they could otherwise have.
Myth 1: The S&P 500 index SPX, +0.21% is riskier than the stock of the company you’re working for
Why this seems plausible: After all, the S&P 500 contains 499 other companies about which you are likely to know relatively little. You know your own company and at least something about the folks who are running the show.
If there’s some major risk to your company, you’ll probably get wind of it in time to make an informed decision.
Why this doesn’t hold up: If you’re the chief executive or on your company’s board of directors, that argument might have some limited validity.
Otherwise, it’s bunk. This line of thinking implies that you will have insider information of some sort. Even if your company (illegally and improbably) shares such information with employees, if you were to sell shares based on that information, you’d be breaking securities laws.
On the contrary, your company’s top management will almost certainly try to put a positive and hopeful spin on everything that might lead investors to dump the stock.
If you think your company stock is likely to be a better investment than the broad average, you’ll be ignoring more than 90 years of data.
A study recently published by Hendrick Bessembinder found that since 1926, the returns on stocks of the majority of public corporations (roughly four out of seven) have been less than the returns on essentially risk-free U.S. Treasury bills.
That’s right: Statistically, your company’s stock has a less-than-even chance of returning as much as T-bills.
It’s even worse: In terms of lifetime dollar wealth creation, the returns of just 4% of all public companies explain most of the entire net gain for the U.S. stock market since 1926.
Collectively, the other 96% of public companies matched the rate of T-bills.
Are you willing to stake your financial future on your belief that your company is one of the 4%? If you are, have you asked your spouse if he or she feels the same?
The good news is that over the past 100 years, the S&P 500 has produced a compound return of approximately 10% — about 400 times as much as T-bills.
