Question No. 5

"There Are Some Myths About
Self Investing.  What Are They and
How Can I Avoid Them?"

Our Response

There are many myths about investing in the Stock Market, so how do you avoid them?

It's simple.

Don't listen to any bunkum.

In fact, don't listen to anything.  Do your own research and invest with common sense and you will not fall foul of any of these "Fairy Tales."

Myth No. 1:  "Sell in May and Go Away"

Here's one myth:

"Sell in May and Go Away"

And the sequel to that tale is: "And don't come back until
St. Ledger Day."

Well, it rhymes.  And it might by some co-incidence work some years, but it's the Stock Market equivalent to an old wives' tale.

The St. Ledger by the way, is in September.  That would mean if you followed this "advice" every year you would be out of the market for 5 months every year.

That's absurd.

If we were in a Bear Market, we'd whole heartedly agree to stay away. 

But for the Fairy Tale to hold sway it needs to be right a lot more times than it is wrong. And it isn't.

Here's how we see it.  Just by applying a dose of common sense.

Unless it's a Bear Market, it's better to be in the market with good value stocks than it is to be playing the timing game.

Here's a little known fact:  80/90% of investment returns on stocks occur around 2-7% of the time. (we found it hard to believe as well).

For example, between 1926 and 1993 the return in the best 60 months (or 7% of the time) averaged 11%.  The rest of the time (93%) returns only measured fractions of 1%.

How could anyone predict which 7% of the time when stocks do really well?

Nobody can.

As a long-term investor, the real danger to your 'Pension Pot' is being out of the market when these BIG moves occur.

Here's an analogy:  a 6000 mile flight from London to Hong Kong would no doubt encounter some turbulence - but they generally get there and on time.

And so it is with investing.  Do your research, decide what to invest in, and let it run until it gets there.  A stock won't just keep going up and up.  There will be a few bumps along the way.

Short term trading just doesn't work for amateur investors.

The highest returns are achieved by being fully invested nearly all the time. 

You have to be in it, to win it.

Myth No. 2:  "Age Dictates Asset Allocation"

And Myth No. 2 is:  "Age Dictates Asset Allocation"

Now, we admit to being a little "anti-establishment."

And we hate so-called "financial advisors" whose sole aim in life is to "advise" people how to invest their hard-earned.

More like:  "Gimme my fees first, then I'll tell you a load of crap.  But I'll make it sound good.  Blah, blah, blah ..."

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Sidebar:  We only ever took advice once from a 'friend' whose brother was a financial advisor.  Way back in the early 80's he 'advised' us to invest in some South China Sea Unit Trust, or whatever.  We ploughed about £10,000 into that fund.  Within 6 months half our money was gone.  No, we don't suffer those incompetent fools any more.
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One of their favourite pieces of advice is to tone down your equity investments the older you get.

They use the old chestnut of telling you not  to be fully invested in shares near to your retirement - "it's too risky."  "You need to be out of shares and into other, safer investments."

Maybe.

To us, safe is a building society account.  Or wads of cash under the mattress. But that safety yields very little return. 

And we fell off our office chairs with this one.  It might have impressed most people but what a load of cobblers.

It goes like this:  Take the figure 100.  Subtract your age from it.  And that's the percentage amount that you should have in stocks.

So, if you're nearing retirement age, say 60 years young, 100 minus 60 equals 40.  Therefore, you should be 40% invested in shares.  And the other 60%? 

Where?  In a post office account?

Yeah, right!

We've never been fans of asset allocation.

Why?

Because long-term, nothing beats equities.  Except maybe robbing banks, the lottery, or marrying into money.

Are we cynics?

No, not really.  We just hate charlatans.

 Myth No.3:  "Invest in High Dividend Shares
for Secure Income"

The MAIN theme of this website is to grow your Pension Pot into something you could have only dreamed of.

To get you enough cash flow to finance your retirement life style.

As mentioned on this website many times, we are all living longer.  Which means we'll all need even more money than we thought we would. (And we haven't even talked about inflation!).

Many folk, (including professionals) think that if you stuff your portfolio with high yielding shares that will give you a fixed income.

Unfortunately, income and cash flow are NOT the same thing.

We'd guess that most investors think that a high dividend paying share is a sign of a healthy company.

Here's what we think:  There's nothing better about a company that pays a high dividend compared to a company that pays no dividend.

Some companies choose to generate shareholder value by re-investing their profits instead of paying a dividend. (all other things being equal).

Those type of companies believe that if they invest in new capital equipment, or invest in research and development, or even invest in buying a competitor, then that will make their shares more attractive and hence the share price will rise.

The best example we could possibly give you for this is Warren Buffett's own company - Berkshire Hathaway.  It has NEVER paid a dividend.  Yet we bet you'd wish you'd bought the shares forty years ago!

And here's something else to consider:  when a company pays its dividend (known as going 'xd') the share price falls by the amount of that dividend.  That's because the company is giving away a valuable asset - it's cash.

Dividends are not guaranteed.  This is covered on our website but a good trend to keep an eye on is the 'Dividend Cover' (a ratio of how well a company can afford to pay its dividend).  A falling dividend cover over, say five years, is a warning sign.

Likewise, a high dividend is a warning sign.

And the Stock Market is slow to forgive any company that has to cut its dividend.

Our suggestion if you want income in retirement, is to grow your 'Pension Pot' and activate drawdown (more on the website).  Maybe have a few dividend paying stocks in your portfolio, but don't make it your main strategy.

Conclusion

There are many more myths in the Stock Market.  We're not going to waste any more time on them.

Take no notice of any of these "sayings."

Our theory is that they have been created by some author/journalist who wanted some publicity. They are mostly gimmicky.

On this website we mention other Stock Market sayings, from both a negative and positive point of view.

Stick to the tried and proven strategy.  And that is a mixture of 'Value' shares, 'Momentum' shares, and 'Growth' shares for the long term.

Stocks are resilient.  And that's no myth.

Footnote

As a newbie, you may want to read the other "Frequently Asked Questions" on this website.  Doing so, will give you a good introduction to running your own DIY Pension.

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