Busting the Biggest Stock Market Myths
“Learn about different investment vehicles and asset classes and… you can make confident, informed choices about what’s best for you.
I am very concerned about the millions of baby boomers who are counting on the stock market to deliver them a safe, sound, long retirement. I am afraid the baby boomers who are counting on the stock market are in trouble.”
—Robert Kiyosaki, 2014 interview
Three of the most pervasive myths perpetuated by typical financial advice are:
- The stock market is the best place to invest long-term,
- Bonds are the best place for your safe and steady money, and
- The trick to successful investing is simply balancing how much you have in stocks and how much you have in bonds, according to your risk tolerance, age, and other factors.
Today, we’re calling “BS” on this limited thinking!
Last week, we issued a warning about bonds in 2018, asking if bonds were still a good place for safe money. (The short answer was, “No.”)
This week, we’re tackling myths #1 and #3, with a little help from a fantastic question asked in the headline of a CNN.Money.com article:
“Stocks are too risky, bonds pay too little. Where do I invest?”
(Unfortunately, their headline was much better than their answer to the question.)
First, let’s handle the myth that the stock market is the best place to invest.
If you prefer upside growth potential combined with volatility, lack of control and huge unpredictable but periodic losses, then YES, the stock market IS the best place for you to invest! However, in our philosophy of Prosperity Economics, we value:
- Control over speculation
- Consistent wealth habits over the “luck” of the market
- Preparation over planning
- Protecting principle over risk-taking
- Saving over “hoping” for a bull market
- Cash flow overaccumulation
- True asset diversification over simplistic, flawed formulas and
- Peace and predictability over sleepless nights
Does Prosperity Economics rule out investing in the stock market? Not at all. We believe in truly diversified portfolios which can include stocks and mutual funds. If you have a 401(k) or a brokerage account and you’re just beginning to invest, you might want ETFs or other funds that track the broader market such as the S & P 500, the Dow Jones or the Russell 2000. If you have specialized knowledge in a certain field, you may find it fun to personally select stocks.
The problem comes when typical financial advice wants to make the stock market your only or your primary investment strategy. When you have no emergency/opportunity fund, no non-correlated investments, no cash flow…when you are at the mercy of the roller coaster ride and you have to count on the stock market to NOT crash to be “okay,” you’re in trouble.
In the video below, I address the myth that the stock market is the best place to invest for long-term growth:
As I mention in the video, I think the stock market used to be a more reliable place to invest. But its future forces us to raise some questions:
- Has the advent of high-speed trading changed the stock market?
- How has the market been affected by the proliferation of mutual funds and the rise of the 401(k)?
- What impact do disruptive technologies, high-profile IPOs, “pump and dump” schemes and social media backlashes have on the market?
- What will rising interest rates do to corporate profits?
- How will future elections, geo-political events and tax legislation affect the market?
- How will the market be impacted as Baby Boomers pull the bulk of their funds out of the market in retirement?
Clearly, past returns are a useless measuring tool.
So what’s an investor to do? In a question to CNN.Money.com, “Jim” put it this way:
“I’m 64 and would like to retire. Problem is, if I invest in stocks I risk losing money to a huge correction, and if I invest in safe fixed-income investments I earn only 1% to 2%. Either way, retirement seems elusive, if not impossible. What’s someone in my situation to do? Jim”
This question sums up the quandary that millions of Americans find themselves in. And the “answer” put forth in their article illustrates perfectly WHY investors feel trapped “between a rock and a hard place.” Author of several retirement books and former CNN editor and money expert, Walter Updegrave had this to say:
“The first thing you want to do is arrive at an appropriate mix of stocks and bonds for your retirement portfolio…The blend that’s right for you will depend on what size returns you want to shoot for and the risk you’re willing to take to get them.
…Just to be clear: Going through this process and investing your savings in a suitable mix of stocks and bonds isn’t a magic bullet. It won’t boost bond yields… Nor will divvying up your savings between stocks and bonds immunize your portfolio from downturns in the stock market. But completely avoiding such setbacks isn’t your goal… Rather, your aim is to limit your downside enough so that you can ride out stock market downturns and participate in the eventual recovery.
So the question becomes how much of a setback can you tolerate before you would panic and dump your stocks?”
As Wall Street skeptics, we think that limiting your investment options to TWO admittedly flawed asset classes—one for growth and another to hedge the losses of the first—is insane! That would be like becoming an interior decorator and deciding to ONLY use yellow and blue in your color palettes. You can decorate in blue, yellow, and many shades of green. But wouldn’t it be silly to eliminate all reds, purples, oranges, browns and various shades of grey from your list of possibilities?
We don’t believe U.S. investors need to be between a rock and a hard place. Portfolios built to last and designed to keep profiting in almost any market may include:
- Life settlements—a life-insurance based investment representing the secondary market for life insurance policies. Life settlements have proven potential for healthy returns with low risk, backed by some of the most stable financial institutions around. Popular for years with institutional investors, life settlements have only recently become available to individuals, usually in the form of private equity funds available only to accredited investors. Bill Gates and Warren Buffet (through Berkshire Hathaway) have been quietly purchasing hundreds of millions in life settlements. As they are based on actuarial math and not correlated to stocks or the economy, they are our favorite long-term growth strategy.
- Private lending has been used successfully by investors for thousands of years and is our recommended strategy for cash flow. Private lending strategies can include vehicles such as real estate bridge loans that provide temporary or interim financing for properties, fractional real estate investments, peer lending, and small business lending through merchant cash advances.
- Direct real estate investments such as rental homes, apartments or commercial office space. If you have the time and energy to invest actively, real estate investing can be financially rewarding. If you prefer to invest passively, look for a carefully vetted bridge loan and private lending opportunities.
- Energy investments, including financing for oil and gas wells or land leases. (More about this in a future post.)
- Whole life insurance, which is not technically an investment, but rather a long-term savings strategy—a cash equivalent comparable to bank CDs (with superior long-term rates) with an additional death benefit as well. The “safe, boring” part of your portfolio, a policy can (in time) be leveraged for more lucrative investments.
Some of our clients hold gold, cryptocurrency, other alternatives, and yes, stocks and bonds in their portfolios.
If you are tired of “same old” financial advice that leaves you feeling trapped, we urge you to think critically and research beyond typical financial advice. Why are certain investments always recommended—while others are systematically ignored—by brokerages, banks, and the mainstream media? How much media funding (not to mention government lobbying) comes from Wall Street entities? Are stocks really the best long-term investment? Your thinking and your options are being systematically narrowed unless you educate yourself.
For more about asset allocation and true diversification, we suggest “The Balancing Act: A Better Way to Allocate and Diversify Assets.”
We invite you to find out more about our Prosperity Economics philosophy and opt in for our complimentary Prosperity Accelerator Pack. You’ll receive a special audio, video and summary sheet about the 7 Principles of Prosperity and also an ebook, Financial Planning Has Failed, that goes into more detail about the products and strategies we use with our clients.
And of course, please reach out to Partners for Prosperity with your questions and to get our recommendations for your specific situation. We have been in business since 1999 and are a registered investment advisor licensed in all 50 states. We specialize in alternative investments and would love to help you find solutions.