Myth 1: This Time Is Different
While everyday is different from the day before in some respects, in other ways (like the sun rising in the east), the past repeats itself. No one knows what the future holds but we do know, from economic history, how markets have reacted and responded to stress at various times in the past. The chart below depicts a half dozen financial stress points over the past three decades and how markets fared after 1,3 and 5 years.
I recall a conversation with a client a few years ago, when oil prices were spiking above $120 per barrel. He was convinced, from all the media coverage, that indeed, “this time was different” than any other point in the past. He was concerned that all of the investment strategies that had worked previously would be doomed by expensive oil prices. Well, through the perfect lens of history we now know that oil prices didn’t rise to infinity and in fact have fallen sharply over the past year or so.
Remember, it’s never different… just don’t count on the crisis seeking financial media to help you with that truth.
Myth 2: Stocks are risky; Bonds are safe
Rarely a day goes by that we don’t hear some version of this myth. Individuals in the Run-Up or Wind-Up phases often say that they “can’t take risk” since time is growing short. This can become a very dangerous approach.
What most investors think of as risk is actually price variability or volatility. Prices of almost everything we buy change frequently and we give it little thought. Egg prices and beef prices move up and down all the time. In the financial markets, however, we are petrified by day-to-day price swings.
The good news is that over time, the stock market rewards patience. Because so many investors “can’t take risk”, stocks have to offer premium returns. That is, to attract investors, stocks have to outpace both inflation as well as other alternatives.
Bonds, or any investment that is tied to interest rates, can be very “risky.” Interest rates, and the expectation of change in these rates, can cause the prices of bonds to move around sharply. On many, if not most days, the price change on 30-year Treasury bonds exceeds the price change in the S&P 500 Index. So much for the “bonds are safe” narrative.
Myth 3: Your Home is a Good Investment
This is a deeply held belief in America, yet for most circumstances, it indeed is a myth. Residential real estate prices peaked about 10 years ago and have slowly been making their way back. That’s good news if you are a homeowner, but does not change the basic formula. When you look carefully at total costs, including upkeep, property taxes and improvements, the math is often less than favorable.
My wife and I purchased our home 27 years ago and I have kept a good record of the major improvements, taxes and other items. If I take our purchase price, adjust for tax benefits and add in the expenses, the total return (using Zillow for current value) is less than 3% per year. In other words, the house value has kept pace with inflation but not much more. That doesn’t mean that the house has been a poor investment; it just hasn’t been a great one. Of course, the investment aspect is but a small component of the utility derived from the house.
Myth 4: Everyone Needs Life Insurance
Life insurance has only two purposes: to create an estate where one doesn’t really exist (like for a young couple with dependency); and second, to create estate liquidity where that doesn’t already exist. If you have no dependency, you have no need for insurance. Sure, I have heard, (and dismissed), the long list of reasons to buy life insurance when neither of the aforementioned conditions exist.
Life insurance should serve a purpose. Without the purpose, the “need” disappears.
Our work is focused on helping individuals sort out financial truth from fiction. Ready for a real conversation?