3 Investment Myths Demystified

While there are many sources for investment advice – some good, some not so good – I find most tend to derail even the savviest investors. With that being said, here are 3 misconceptions you should reconsider:

Always Do What You’ve Always Done.

A common theme I encounter as I advise those approaching retirement with accumulated assets is the assumption that they should continue to invest the same way during retirement as they did while they were employed. This couldn’t be further from what experience has confirmed. Investment and tax strategies used to effectively protect and distribute wealth are inherently different than those used to accumulate wealth. More specifically, attempting to invest for growth in hopes the annual appreciation will be sufficient enough to support annual income needs has been found to be one of the key reasons many are prematurely depleting their retirement assets.  

In fact, Robert Merton, a Nobel Laureate in Economics, and professor at the MIT Sloan School of Management, explains that “Our approach to [retirement] saving is all wrong: we need to think about monthly income, not net worth.”

As such, a strategy of allocating a portion of your portfolio to conservative assets with a demonstrated ability of producing income in a sustainable, repeatable, and somewhat verifiable manner would be a more prudent measure. Depending on your risk tolerance, you may consider employing a careful selection of quality stocks and bonds with consistent dividend and interest performance, along with very specific types of annuities. Remember to be careful regarding annuities, though. Many are heavy with fees and extremely restrictive. My preference would be those exceptional variations that offer the ability to generate a lifetime income while also maintaining access to and control of your money. This, in concert with the remaining assets prudently invested with an eye toward minimizing risk in volatile markets, has proven to be exceedingly more effective.

Bonds Are Bonds.

Unfortunately, most people and, believe it or not, many advisors believe all bonds act alike. Not true…not true at all actually. The general rule is that all bonds have an inverse relationship to interest rates. That is, when rates go up…bonds go down, and vice versa. To clear this up, let’s quickly examine the last time interest rates went down.  

In 2008, the U.S. 3-month Treasury Bill went from 4.36% to 1.37%…a significant drop by any measure. Yet consider what happened: After a 3% reduction in rates, the Long Term Treasury index rose by over 22%. However, both the U.S. Corporate index and Domestic High Yield index declined by -4.94% and -22.10% respectively. Furthermore, when rates went from 1.37% to .15% in 2009, just the opposite happened. The U.S. LT Treasury index fell by -12%, yet both the U.S. Corporate and Domestic High Yield indexes rose by 18.68% and 58.09% respectively. So much for the rule!

Why is that?  

Simple – there’s more to bonds than just rates.  

While treasuries are backed by the full faith and credit of the U.S. Government, corporate bonds are not. Therefore, when rates are reduced in response to a faltering economy, both high grade and high yield corporates must contend with credit and default risk…treasuries do not. So when markets are in decline, and rates are falling, there’s a flight from riskier assets like stocks and corporate bonds, to treasuries – causing the riskier assets to decline, and treasuries to rise. Conversely, when the markets show signs of recovery, many flee treasuries for high yield and corporate bonds as they typically lead the market out of the basement, as was the case in 2009 and 2010. So the key to successful bond management is not only knowledge of the underlying fundamentals of each sector, but an understanding of investor behavior as well.

A “Buy and Hold” Approach is Always the Best Option.

While the notion that you should “buy and hold” your investments regardless of market conditions may be appropriate for some, it’s not so for others. So the question is…is it appropriate for you?

Should you be young, and in the enviable position of still accumulating assets with several decades between you and retirement…then yes, it may apply to you. I say “may,” assuming you’ll be fine with some bumps along the way. That being said, those bumps are precisely why it makes sense. As the market goes up, you buy fewer shares with your consistent investment, and when the market goes down, you buy more.  

However, should you be approaching retirement with accumulated assets, “buy and hold” can be anything but your friend. While it may have made sense during the “go-go period” of the 1980s and 90s, it has not held for the last decade and a half. In fact, had you retired with a nice nest egg in 2000, and placed your assets in a “buy and hold” portfolio that tracked the market, aside from a few months in 2007, you would have been underwater for most of the last 15 years. For that reason, once you’ve positioned a portion of your portfolio to generate the necessary monthly income, the remainder should be allocated to strategies that enable you to prosper in both up or down markets.  

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