Mythbusters: Busting Lies About The Sharemarket
Myth 1: If you hold shares for long enough, they will go up
145 out of the top 200 shares have seen losses in the last 52 weeks but just because you hold on to these shares, does not mean that they will recover those losses.
In fact, one thing that the last couple of years has magnified is the fact that some of these companies may not be around at all. All good traders understand that it's best to let your profits run and to cut your losses.
From 2003 to 2007, investors were spoilt. All you had to do to make money was take a dart, throw it at a dartboard with stock names, buy the stocks and the chances were that you would make money.
But talk to someone who bought the market at the top of the 1987 stockmarket boom, then waited through the crash and the next ten years before the sharemarket managed to recover back to the previous highs.
Indeed, talk to anyone who invested in ABC Learning Centres, Babcock and Brown or Allco and you'll see that when businesses fail, holding onto the shares hoping for recovery is a futile game.
The truth is that there is no rule that says share prices will eventually go up.
Myth 2: High risk = high return
High risk does NOT equal high return.
High risk DOES equal an expectation of high return. The key word is 'expectation'.
It does not mean that taking a high risk will result in high return. What it does mean is that when you take more risk you expect more return.
Whether or not that expectation will be fulfilled is another thing altogether.
Myth 3: Diversification helps you make money
Diversification is not about making money. It's about reducing risk.
If you wanted to maximise your returns, you would not diversify. You would simply pick the one company that would make you the most money and put all of your money in that one company.
The problem with this is that no-one has a crystal ball and knows which stock is going to be the best gainer.
So while diversification does water down your returns, the reason why investors do it is to reduce their risk.
To reduce risk, the secret is to choose stocks that do not move together.
Myth 4: Past performance is a good guide for the future
The market tends to move in cycles like the economy. If you make your investing decisions based on the what has happened in the past, you are not trying to identify where we are in the cycle which can be more crucial.
For example, when the economy looks like it is slowing down, defensive stocks tend to do better than the market. And when the economy does well, or grows, then growth stocks are in favour.
Mythbusting
All in all, mythbusting is about understanding the sharemarket. There are many, many myths in the market but the key to making money is about:
understanding the sharemarket
understanding the businesses that you invest in and
understanding yourself.
Happy investing!
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