Stock market and Investing Myths Part 1 - Five Investing Myths Exposed!

Friday, February 25, 2011

The up-to-date stock market crash of 2008 has left millions of investors questioning their accepted speculation reasoning. Financial advisors are finding it more and more difficult to convince their clients of sound financial plans -- and rightfully so. Americans are wising up to the reality that investing may be more complex then they originally thought. Or maybe investing is not more complicated. Maybe investors have plainly been miseducated.

Miseducation can come in many distinct forms. Television stories, uneducated advisors, propaganda pieces, not to mention just good ol' fashion uninformed word of mouth. In fact word of mouth is probably the biggest proponent of miseducation. But just because Uncle Jimmy says it, doesn't mean it is true. In this multi-part record series I'm going to expose some myths generally associated with the stock market and investing. If these myths are deeply held beliefs of your own I guarantee you can enhance your financial performance by plainly re-educating your speculation mindset.

Todays World News Headlines

1. The Stock market Must Go Up To Make Money

In my years of trading and instruction I have found this myth to be the most common mis-understanding of all. It makes excellent sense. When it comes to investing no single message is preached more clearly than this one. "Good news on Wall St. Today, the stock market rose 79 points." Or "Tough day on Wall St as stocks fell a anticipated 87 points". These headlines and messages are no ifs ands or buts seared into the subconscious minds of virtually all Americans. Even well educated citizen like myself who understand how the market works find it hard to not smile when we hear of huge gains on Wall St.

However just because the market goes up it doesn't mean citizen made money. And just because the market goes down it does not mean citizen lost money. The truth is there are three directions the stock market can, and does move: Up, Down, and sideways. And you good believe if there are manifold ways the market can move there are also manifold ways to make money with each directional move. Myth: Busted.

2. Stock market Investing Is Risky

This is an equally popular myth yet one which can also be debunked. I already stated that there are three ways the market can move: up, down, and sideways. And I've already established that most citizen think when the market goes up you can make money. But that is only 1/3 of the choices since the market can move three directions. That means the odds are stacked against you 2/3 of the time. With that math the risk associated with this myth may appear true. Any way I also said there are distinct strategies to make money with each of the directions the market may move. That means with a minute instruction you can learn to make money in each of those three directions.

The risk here is not in the market itself but rather in the lack of education. For citizen who do not have a allowable instruction of the stock market these investments can no ifs ands or buts be risky. In fact if you do not have an instruction the odds are 2/3 against you that you will receive an instruction the hard way - loosing money! Any way with a minute instruction and a minute knowledge you can make money in 3/3 market directions. Myth: Busted.

3. Over 20 Years The Stock market always Goes Up

This myth is a popular of financial advisors and to be honest it is kind of true. during the last 100 years (which I expect encompasses your lifetime) we've had an fascinating series of events. Let's look at that for a moment: If you invested ,000 in 1909 for 20 years by 1929 that money would have been worth over ,000! Not bad. But if you had started in 1911 and invested ,000 20 years later in 1931 you would have just right colse to ,000. Oops. Wrong 20 years. If you had invested ,000 in 1919 for 20 years it would have been worth roughly ,000 in 1939. Oops. Wrong 20 years. If you had invested ,000 in 1929 (God Forbid) getting back to a ,000 value would have taken until about 1955 (A full 26 years!). Oops, wrong 20 years. ,000 in 1939 would have been worth about ,000 in 1959. Not bad. 1949-1969 would have yielded a similar result. 1959-1979 would have made some money, but not nearly sufficient to keep up with inflation. 1969-1989 would have roughly doubled your money. 1979-99 was great. 1989-2009 worked well too. But what about 1999-2009? uh-oh. If you invested ,000 in the market in 1999 today that ,000 would be worth roughly ,000.

My point is the market doesn't always go up. And it is no ifs ands or buts un-cool if you're one of those citizen who get stuck in a 20 year down cycle when you're ready to pull out your money. And is it no ifs ands or buts worth waiting 20 years to find out if you will get to retire during a market high or a market low? To top that off currently (in 2009) many economists are predicting the next 15 years to be one of those large down cycles. With such a spotted history and so many negative predictions is it no ifs ands or buts worth risking the next 20 years to be anything like 1911, 1919, 1929, 1939, or any of the other rough 20 year cycles? Truth is the market does Not always go up over any 20 year period. And as 1909-1911 showed us, only a merge of years can make the distinction in the middle of a no ifs ands or buts great 20 return and a downright devastating 20 year period. Myth: Busted.

4. The Best Way To Make Money In Stocks Is To Buy And Hold

Buy and hold is primary wisdom. But it parallels the first three myths we've talked about. The idea is you buy a stock and hold it and in a few years it will be worth more. Hopefully a lot more. Since buy and hold doesn't always work citizen get the idea that investing is risky. Truth is speculation risk is directly proportional to the estimate of investing instruction a someone has (or does not have). In the pro investing world we have distinction on Buy and Hold - we call it Buy, Hold, and Pray. That's because with this strategy a someone buys a stock, they hold it, and pray it goes up. Of course with three potential market directions, and the reality that markets do not always go higher, the investor may be praying quite a bit only to perceive their chances of having that prayer answered are about 1 in 3! Myth: Busted.

5. News And research Groups Have the Hot Stock Tips

This final myth is one of the most popular speculation strategies for high paid professionals. Some citizen make a lot of money selling these hot speculation tips to citizen who want to put their money in the market. Any way the foundation of Dow law no ifs ands or buts proves this method to be a myth. Charles Dow wrote colse to the turn of the 20th century and is the father of the Dow Jones industrial median which we often refer to as "the market". He states in his theories that there are 3 phases to the growth of a trend. The Accumulation phase, the public Participation phase, and ultimately the Dispersion phase. The accumulation phase is when major institutions begin to buy. Like the name suggests the public participation phase is when the masses of the public begin to buy. And the dispersion phase is when the major institutions (who started the trend) begin to sell and "disperse" their positions. The fascinating thing about this is Dow directly tied news associated stories to the dispersion phase. Basically stating by the time it's in print and the news is high, the move is over and the "smart money" has already begun dispersing their positions.

Using the basis of Dow law alone we can assume if it's in print it's too late. In fact generally speaking this proves true among printed stock recommendations. I recently analyzed one of these picks with a student. The pick was for the stock to be higher in 12 months yet after a brief determination we carefully there was no ifs ands or buts zero green signs to push forward with this trade. There were about 8 yellow indications saying this might be a good trade in the future, and there were 3 red flags telling us reasons this stock should go down in the near future.

The reality about hot stock tips is they are normally not that hot. primary personel determination is always more reliable and avoiding these tips will help you avoid losses in your portfolio. Myth: Busted.

Stock market and Investing Myths Part 1 - Five Investing Myths Exposed!

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