|
by Michael Rogan
Special to Tropical Breeze
When it comes to investing, misconceptions
abound. More often than not, these mistaken beliefs are fueled by
someone’s profit motive, but sometimes we need to look to
history to explain how we ever developed such wrongheaded thinking.
In this column, I will endeavor to list many of the classic
fallacies and delusions surrounding investing and attempt to help
you reframe your thoughts.
“I’m a short-term
investor.”
You can either be a short-term trader, or
a long-term investor. The reverse is not possible. Every study ever
done has shown a negative correlation between trading and
investment performance. That is, the more you trade, the worse you
do.
“I don’t want to sell this
stock now because: 1) I have so much profit, I’ll owe too
much in capital gains or 2) I’m at such a loss, and I already
have enough loss carry-forwards for as long as I’ll
live.”
It is a very common mistake to let tax
consequences dictate your investment decisions. But that is letting
the tail wag the dog. Not that tax consequences are irrelevant, but
they should never be paramount. If you wouldn’t buy the
investment today, you shouldn’t continue to hold it,
regardless of the taxes.
“I know you shouldn’t put all
your eggs in one basket but my company’s stock (or any
company’s stock) has done very well for years. I won’t
sell it ever.”
There’s an old adage about investing
in stocks. It goes, “while it is possible to get rich by not
diversifying, you can’t stay rich without
diversifying.” Just because you have owned a high flyer for a
while doesn’t mean it will continue to do well. In fact,
because a stock (and the underlying company) has done well for a
long time might be exactly the reason it won’t outperform in
the future. Throughout time, and specifically my career, the
correct advice has always been to encourage people to diversify.
I’ve had clients with huge portions of their investments in
WorldCom, Home Depot, Merck, Apple, Wal-Mart, Cisco, Oracle,
Coca-Cola and many others. This list includes companies whose stock
prices imploded due to scandal, competition, or sometimes, as in
the case of Wal-Mart, as a victim of its own success. Of course,
the current local favorite in this category is Publix. Please note,
individual stocks do not rise dramatically forever like magic. This
is not an indictment of any of the companies mentioned or their
management or employees. Many are great companies. But if you are
loaded up in your employer’s stock, ask yourself if it is
really wise to bet both your career and your retirement on the same
company.
“I’m a conservative investor;
I can’t afford to lose any money.”
I hear this from virtually everyone who
nears retirement. This is usually said to me by people who want me
to invest their money in investments with absolute guarantees like
CDs or fixed annuities, so their nest egg will be
“safe.” All of their lives, they were warned that the
stock market was “risky” and you can’t afford to
be risky in retirement.
Someone retiring today at age 62 was born
in 1945. If someone had invested $1,000 upon their birth in an
investment that simply performed as well as the stock market during
their 62 years, that $1,000 would today be worth $1 million. From
$1000 to $1 million without adding any money. (Incidentally,
adjusting for inflation, that $1,000 would cost about $6,600
today.)
So how did we come to think of the stock
market as risky? The answer lies in history. The current generation
of retirees was raised by people who endured the horrors of the
Great Depression. Those of us born after that time cannot really
imagine an economy so bad that more than one in four workers could
not find a job. Or an economy where a dollar was worth more next
year than this year due to deflation (1931-1932). Out of love, the
parents of today’s retirees hammered home the point that the
stock market was not to be trusted. Never mind that the Depression
was caused by the teenaged Federal Reserve or that we have never
since experienced anything like that (nor are we likely to
again).
Today’s retirees by and large
don’t have the robust pensions their parents did. Few have
company paid health care. On average, their parents had a 10- to
12-year life expectancy in retirement; today’s retirees may
well be looking at a 25- to 30-year retirement, where the ravages
of constantly rising prices will take a major toll on their
lifestyle. The only investment asset class in the history of this
country that can provide a sufficient average return to keep up
with inflation and allow withdrawals of around 5% of the nest egg
annually, without depleting principal, is equities. That’s
not a recommendation, just a math-based fact.
It’s been said that we don’t
really know what we’re thinking until we hear what
we’re saying. Perhaps it’s time to listen to ourselves
and reconsider some of the “facts.”
Michael Rogan is president of Rogan &
Associates Financial Planners, a locally-owned financial planning
brokerage firm based in Safety Harbor. He brings nearly two decades
of financial expertise to the local airwaves on the radio show,
Financial Planning for Life, heard at 11 a.m. weekdays on AM 1250
WHNZ. For more information, call 727-712-3400 or visit
www.RoganFinancial.com.
|
Front Page 
Columns 
