Investing with the Trend: A Rules-based Approach to Money Management

Chapter 2Fictions Told to Investors

Market myths are generally perpetuated by repetition, misleading symbolic connections, and the complete ignoring of facts. The world of finance is full of such tendencies and this section of the book attempts to show you some examples. Please keep in mind that not all of these examples are totally misleading, they are sometimes valid, but have too many holes in them to be worthwhile as investment concepts. And not all are directly related to investing and finance. Enjoy!

Believable Misinformation in Investing

Remember from Chapter 1 that many of the things we learned when we were young simply are not true? How many things have you learned in regard to investing that also just might not be true?

1. Buy and hold is the only way to be successful in the stock market.
2. Dollar cost averaging is a good technique.
3. Diversification will protect you from bear markets.
4. Compounding is the eighth wonder of the world.
5. You must remain invested at all times or you will miss the 10 best days each year.
6. Average returns are never better than compounded returns.
7. Probability and risk are the same thing.
8. Equity asset allocation will protect you from bear markets.
9. Economists are good at predicting the market.
10. Chasing performance is a common technique.

The Void of Accountability

How often do you watch economists and market experts in the financial media (television, print, etc.) offer strong opinions on the future direction of the economy and the stock market? Do ...