3 Market Myths Debunked

This weekend, the stock market bull turned 10 years old, handing investors more than 17% in annualized total returns along the way.

According to my old S&P coworker, Howard Silverblatt, that performance is more than three times better than the annualized return from the end of 1999 (5.43%) and almost twice as good as the return since 1989 (9.64%).

Of course, plenty of people stayed on the sidelines and lots of experts encouraged them to do so.

This is pretty common.

When shares of U.S. companies are going up, they say stocks are getting too expensive.

When the market is falling, they say it’s too dangerous to jump in because more downside is certain.

And when stocks are going sideways, they repeatedly say the action proves investing in U.S. shares is an outdated strategy.

This kind of hyperbole makes for interesting reading, but it can also end up dooming your nest egg to a life of anemic gains. Or worse, repeated losses.

So today, I want to talk about three major market myths that continually float around out there…

Myth 1:Buying and Holding Good Stocks Doesn’t Work

Market watchers have loved saying “buy and hold” approaches don’t work for as long as stocks have been trading.

Traditionally, you would hear this from stock brokers who stood to make a lot more in commissions by encouraging their clients to trade in and out of positions. But even in today’s world of low-cost brokerage accounts, there are still plenty of experts telling investors that long-term investing is a stupid move.

I agree that a buy-and-hold approach isn’t ideal for some investors and there are plenty of active trading strategies that work well.

However, the idea that you can’t make very good money by sticking with big companies and holding them for years on end is patently false… especially if their stocks pay nice dividends.

Here’s an illustration that will probably surprise you…

The top three contributors to the S&P 500’s performance during this bull market have been Apple, Microsoft, and JPMorgan.

No real surprises there.

But in fourth place? General Electric.   

Yes, the same General Electric that has been absolutely decimated in recent times!

Despite all that pain, the fact that the stock was even lower in the throes of the Great Recession – along with all the dividends it paid along the way – still manage to put its total return toward the very top of the list.

So you can make LOTS of money by simply buying solid dividend payers at fair prices and then doing nothing more for years at a time.   

Of course, a lot of folks will say it’s impossible to find good values now that the market has run up so much over the last ten years.

Myth 2: Buying Stocks Right Now Is a Sucker’s Move

The chorus of stock market naysayers grows with every new all-time high in the S&P 500. And to be sure, we are no longer seeing a huge smorgasbord of undervalued companies out there.

At the same time, you CAN still find good bargains. In fact, some of my favorite blue chip names have actually been going down even as hot names continue to rise on hype.

What you have to remember is that generalizations like “stocks are now overvalued” don’t tell the full story. There are many thousands of individual companies trading out there – each of which needs to be evaluated on a case-by-case basis.

Just because the market is sitting at some particular P/E ratio doesn’t mean there isn’t a small tech firm experiencing tremendous growth or a large retailer being unfairly punished because of its latest earnings report.

In addition, there are plenty of ways to play stocks more aggressively or profit from short-term swings.

The key is determining your goals and then sticking with the plan you’ve made.

Which brings me to one last major market myth…

Myth 3: You Can’t Make Money If Stocks Aren’t Moving Up

Nothing could be further from the truth.

As I’ve already explained a million times, you can easily collect solid dividend checks month in and month out no matter what the underlying stock is doing (or not doing).

In addition, the market is always moving at least a little bit every day. So you can also use advanced timing tools to play the many peaks and valleys that occur within a longer period of sideways action.

Plus, there are two more ways to make money from stocks during sideways – or even down – markets:

For starters, you can sell options to generate additional income from stocks you already own or even on stocks you’d like to own.   

You can also aim to profit as individual stocks – or the broad market – falls. And you can do this by buying put options… short selling… or simply using inverse exchange-traded funds (ETFs).

So the bottom line is that there are countless ways to make money from the stock market, especially if you choose to employ a combination of the ideas I touched on in today’s article.

Really, the only bad approach is letting others scare you away from one opportunity after another.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The Daily Reckoning