If you search the words “investment advice” in Google, you’ll get over 500 million results. It’s a good bet that if you click on a few of those links, you’ll see lots of conflicting information. In fact, much of the advice you see online is nothing but fantasy. Here are three investment myths you need to ditch in 2016.
Myth #1: Bonds are Safer than Stocks
This nugget of supposed wisdom is a difficult one to lay to rest. On the surface it seems that bonds are the safer, if somewhat boring, investment target. Bonds have historically outperformed stocks in the short term, but does that mean they’re safer? Not necessarily. The bond market is flooded because of its perceived safety. An overcrowded market and rising interest rates mean that bond funds could plunge as much as 25 percent, causing a loss of principal.
In another twist, even though it’s true that bonds historically outperformed stocks, stocks have also consistently earned more over the long term. During poor markets such as the Great Depression and the more recent Great Recession, stock funds plunged. However, investors who stuck it out found their portfolios back to pre-plunge highs over time. And, that’s the point. The economy recovers and stocks do, too. When it comes to long-term investing, stock funds typically bring in a better yield. Of course, a diversified mix of investments, long- and short-term based, on your financial situation is the best overall strategy.
Myth #2: A Strong Dollar Means a Strong Economy
In Ken Fisher’s book, The Little Book of Market Myths, Fisher discusses the commonly-held investing belief that a strong U.S. dollar equals a strong economy. Fisher, founder of Fisher Investments and long-time Forbes columnist, points out that a strong dollar actually reduces the value of exports. Countries may turn to less expensive options and purchase fewer American-made goods. A strong dollar has an effect globally as well, often causing difficulties for emerging economies.
Myth #3: Invest in Gold — It’s Always Safe
What do you think of when you hear the word “gold?” Luxury? Wealth? An investing safe haven? That’s what you hear every time the economy tanks. But is gold really a safe haven for investors?
The Egyptians created gold jewelry as far back as 3000 B.C., but the precious metal wasn’t used for currency until approximately 560 B.C. Trade was becoming more widespread and merchants required an easy and standardized way to simplify operations. Gold jewelry was already valued and the gold coin stamped with a seal quickly became the solution to the merchant trade quandary. Gold became a worldwide standard. Great Britain adopted a metals-based currency in 1066, with the British pound, shilling and pence all based on the amount of silver or gold it represented. Gold became a symbol of wealth throughout Europe.
The United States established its own bimetallic standard in 1792. Every monetary unit was backed by gold or silver. In 1913, the Federal Reserve began issuing promissory notes, the equivalent of modern paper money, which could be redeemed on demand for gold. The 1934 Gold Reserve Act put an end to the minting of new gold coins. In 1971, the gold standard was discarded and the U.S. has used a flat money system, not tied to any specific asset, ever since.
While the thought that investing in gold is safe and lucrative is romantic, it just doesn’t hold true. Gold has less power and continues to earn less as time goes on. During the 1987 stock market crash, gold rose a not very impressive 5 percent. During the Great Recession, it fell as much as 30 percent. Gold is far from an investor’s safe haven.
So how do you protect yourself? Start by ditching those wealth-destroying fairytales above and carefully researching your options before investing.