There are lots of half-truths and falsities involving the stock market, some of which you simply can't afford to believe. In the interest of making you a more informed investor, here are three of these myths debunked, courtesy of our writers.
Matt Frankel: Over the 10-year period from 2004 to 2013, the S&P 500 produced annualized returns of 7.4%, while bonds averaged 4.6%. However, the average investor with a blend of equity and fixed-income investments achieved just a paltry 2.6% annual return, barely ahead of inflation. How can this be possible?
The answer is simple: Instead of simply buying solid investments and holding on, many investors believe that the best way to make money in stocks is to try to time the market -- buying and selling stocks whenever it "feels" right.
Unfortunately, we tend to let our emotions, particularly greed and fear, get the best of us and do exactly the wrong things at the wrong time. When stocks are plummeting, we tend to panic and sell. And when stocks rise, too many people buy to try to ride the momentum. Finally, many investors sell great long-term stocks after just a small gain. I'm guilty of doing this myself -- I bought Tesla Motors when it was trading in the 20s several years ago and sold after the share price doubled, thinking I had made a brilliant move. We all know how that turned out...
The lesson here is that good old-fashioned buy-and-hold investing is the best way to go and will prevent you from making silly, avoidable mistakes with your portfolio.
Dan Caplinger: Many investors make the mistake of thinking that the U.S. stock market is reflective of the health of the U.S. economy, with a strong American business community automatically translating into winning stock market returns. Yet the shift toward a more global economic environment has changed the rules for stock markets, and now, even a U.S. stock index that focuses on companies headquartered within the U.S. can bear plenty of exposure to other influences far beyond U.S. borders.
The most obvious examples of this are multinational corporations. An extreme case is Philip Morris International, which is headquartered in the U.S. and included in key indexes like the S&P 500 but does substantially all of its business abroad. When you look at Philip Morris International's results, you can see that the strong U.S. dollar has actually hurt its results, because it largely gets revenue from foreign sources denominated in foreign currency, and weak foreign-exchange rates turn that foreign currency into fewer U.S. dollars.
To a lesser extent, most of the largest companies in the U.S. stock market do at least some of their business abroad, and so their share prices more often than not reflect strength in their global markets rather than just in their domestic operations. To know whether your stocks are performing well, you have to look beyond their U.S. prospects to see whether they can expand across the world as well.
Todd Campbell: It may be true that index funds are an easy and effective tool for investors, but it's a myth that investors can't do better than an index fund.
Investors who bought and stuck with disruptive and game-changing companies such as Amazon.com, Apple, Netflix,and Priceline through thick and thin have significantly outpaced the S&P 500 in the past decade, and there have been plenty of opportunities to buy these companies along the way (just ask Motley Fool co-founder David Gardner, who first bought Amazon in 1997).
Of course, it isn't easy finding great companies like these to stow away in long-haul portfolios, but by conducting research, exercising some street smarts, and embracing a healthy dose of due diligence, you can do it.