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8 Biggest Investment Myths

A few weeks ago I spoke to the Traverse City Economic Club in my hometown.

It was the first time I gave this presentation (and my first personal conversation since the start of the pandemic) about the 8 biggest investing myths.

I thought it would be worth sharing so here are the slides:

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Here’s a quick description of each:

Myth #1: You have to time the market to be successful.

Not true…if you have a long time horizon. See here:


Myth #2: You should wait till the dust settles to invest your money.

Here’s a good explanation for how the stock market has worked in general over the years:

  • The economy was terrible in 2020, yet the stock market boomed.
  • The economy is on fire in 2022, yet the stock market is selling.

What did you give?

I guess you can blame everything that happens on the Fed, but look at this chart I pulled from my first book on annual returns at various unemployment levels:

Investing when things look bleak can yield amazing returns. Investing when things go well usually yields low returns.

Obviously, this is an oversimplification, but it makes sense that when the economy is in crisis the returns will be higher. That’s when prices are low!

And when the economy is firing on all cylinders, prices have already gone up.

The stock market also does a good job of propelling the economy.

In 2009, the stock market bottomed out in early March. The unemployment rate continued to rise until it was parked 8 months later in October:

By the time the unemployment rate peaked, the stock was already up about 60% from the bottom.

Or how about housing prices after the biggest housing crash we’ve ever seen? They didn’t come down for three years after the stock market:

By then the stocks were already up more than 100%.

If you wait for things to go right you are going to miss out because the stock market doesn’t care about good or bad, only better or worse.

Myth #3: Just wait for things to be “normal” to start investing.

This is the US inflation rate over the last 100+ years:

Now let’s take a look at 10-year Treasury yields over a similar time frame:

I’m having trouble figuring out when inflation or interest rates were normal on these charts.

Here’s a decade back of financial market yields, bond yields, inflation rates, economic growth, earnings growth, and dividend yields in the 1930s:

Which of these environments was normal?

There is no such thing as normal in the markets or the economy. The only constant is change.

Myth #4: A high yield makes for a safe investment.

This is the average dividend yield for AT&T going back to the end of the century:

Five percent isn’t bad, is it? Just clip that coupon every year.

Now here is the price chart:

The stock is up more than 50% in prices since 2000 (and 40% off prices since 2017.) Yes, you still earned those dividend payments but your returns were terrible.

In fact, you underperformed a simple total bond market fund, but with more volatility:

Now I am not saying that you should avoid investing in dividend paying stocks.

A basket of dividend growth stocks can be a great addition to the right portfolio.

You cannot rely solely on yields to save you when investing over a long period of time. It is the total return that matters.

Myth #5: New highs mean the stock market is about to crash.

I know it sounds scary when the stock market is at an all-time high because one of those highs will be the high before a bear market.

But all-time highs are perfectly normal:

Over the past 100 years, 1 out of every 20 days the market has opened has closed at an all-time high.

Myth #6: The stock market is like a casino.

Whenever the stock market falls it feels like the forces that are there are out to get you. People always compare the stock market to a casino when they lose money.

I never understood this analogy.

At the casino, the longer you gamble, the more likely the loser is to walk away. The casino has better odds than you. This is math.

But the longer you invest in the stock market, the higher your chances of success:

On a daily basis, it is basically a coin between positive or negative returns. But increase your holding period and your chances of seeing profits throughout history have increased.

The longer your time in the stock market, the more likely the winner is to walk away.

If the casino operated this way they would be out of business.

Myth #7: Risk is quantitative.

One of my biggest problems while working on the institutional investment complex was the over-reliance on math equations to define risk.

I understand the need for benchmarks. And risk-adjusted returns can help investors gain better control over what’s happening in a portfolio or individual strategy.

But over-reliance on quantitative measures can be a deterrent if you believe it can help you better predict what is going to happen in the future.

While I am crazy about data, there has to be a qualitative aspect to investing as well.

Buffett once said, “The risk comes from not knowing what you are doing.”

Carl Richards wrote, “Risk is what you’ve thought of everything.”

For individual investors, these are the only two questions that really matter:

(1) Am I on track to reach my financial goals?

(2) How do I reduce the likelihood that I will not reach these goals?

You can never give yourself 100% assurance on these questions but therefore planning is a process, not an event.

Myth #8: Complex problems require complex solutions.

Let’s say you have a portfolio of $1 million. This is the annual income you would earn on this money if you put the entire amount into the treasury over a period of 10 years:

  • 1960: $47,000
  • 1970: $78,000
  • 1980: $108,000
  • 1990: $82,000
  • 2000: $67,000
  • 2010: $37,000
  • Now: $19,000

Interest rates are rising, but they are still lower than they have been historically 99% of the time.

Because of this low rate environment, a lot of investors and salespeople will be pushing for more complexity for lower yields.

But when you boil it down, there are really only two options for investors:

(1) take more risks

(2) Lower your expectations

The financial market is a complex adaptive system but you don’t have to struggle complicated to complicated to be successful.

The simple is often more effective when solving complex problems like the market.

Further reading:
Why Simple Beats Complex

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