Today let’s address some common myths and misconceptions about the U.S. stock markets.
These are very common beliefs – don’t feel bad if you recognize one or more of these in your own thought patterns!
Myth 1: I should listen when (insert pundit here) says that the market is going to go (up, down, sideways, crazy).
Facts: People in the media need you to believe they can predict the market. Without stoking your fear or greed, they would lose your attention. Nobody wants to read from or watch someone who comes on and shrugs saying, “I have no idea what’s going to happen next.”
But that’s 100% the truth. You cannot predict where the market is going. Period. It doesn’t matter what indicator or economist or commonality to past events or weather event or Super Bowl champion (seriously) or political party in office they point to, it doesn’t predict anything.
I wish I could predict the market. I wish anyone could. It would make investing less mysterious and difficult. But the world is a confusing and uncertain place. The stock markets take that unpredictability to an amazing degree.
Bottom line: Don’t try to predict the market or listen to anyone who claims they can. Use a diversified portfolio and stay disciplined to get the best odds of reaching your goals.
Myth 2: Paying attention to the S&P 500 index or the Dow Jones index tells me how my retirement savings are doing.
Facts: There are only 30 companies in the Dow Jones index and (no surprise) 500 in the S&P 500. They represent the largest companies in the United States.
These indices also ignore many thousands of other investments. What about smaller stocks, all bonds, real estate, and every investment abroad? These investments could be moving in the same or complete opposite direction of the S&P 500 or Dow Jones.
Bottom line: The media loves to stir things up when we see a large drop or large gain in the S&P 500. A well diversified portfolio only has a moderate amount invested in these companies.
Myth 3: A solid company is a solid stock investment.
Facts: I’ve heard many times from people that they own the stock of a company because “I know it’s well run” or “I know the people running it are quality people”. Many factors influence the performance of a stock other than how well a company is run.
A company’s stock can go down because a competitor announced a bad performance. Economic or political factors can impact the price of a stock. And sometimes bad guys do well (at least for a while) – Enron’s stock was a great one to own…until it wasn’t.
Bottom line: For most investors, picking individual stocks adds too much risk and not enough diversification. Picking because you believe in the company or its people doesn’t make you a smarter investor.
I hope you found this helpful and re-framed some of your perspectives on the stock market. Hopefully it also helps to process the constant media barrage!