The facts about Market Truisms: Bonds are Safe After four months of waiting we bring it all together in this final part of our 9 part series to give you the actual facts surrounding what are considered to be market truisms to help you become a better informed investor. Truism 1- Investing in countries with high GDP growth produces higher equity returns. Fact- There is no correlation between a country’s GDP growth and returns from that country’s stock market. Truism 2- Invest in good management. Fact- Having good management is always very important but it is not a guarantee of performance. Truism 3- We all can tell the difference between good news, bad news and noise. Fact- Information is not wisdom and Professor Robert J Shiller (author of Irrational Exuberance, Princeton University Press 2000) researched and discovered that no significant news was in the newspapers prior to the 1929 and 1987 stock market crash. Truism 4- Buy stocks that have done well, as positive momentum is likely to continue. Fact- Famed ice hockey player Wayne Gretzky summed up his secret to success when he said, “go where the puck will be, not where it is.” Truism 5- High numeracy and academic intelligence guarantee out performance. Fact- Long-Term Capital Management (LTCM) was made up of the smartest people in the room but by the end of September 1998 LTCM had lost substantial amounts of capital and to avoid the threat of a systemic crisis in the world financial system the US Federal Reserve orchestrated a $3.5 billion rescue package from leading US investment and commercial banks who in return received 90% of LTCM's equity. Truism 6- Don’t fight the Fed. Fact- Central Banks do not control the markets. Historically, discounting interest rates has not stopped asset bubbles from continuing their fall. Truism 7- High dividend paying companies provide low EPS growth and low capital growth. Fact- A study by Zhou and Ruland 2006 revealed that the high dividend high payout companies on average achieved higher growth. Truism 8- Short term earnings growth drives stock prices. Fact- In 2007 company earnings looked fantastic and the stock market subsequently fell by almost 60% over the next 18 months. Truism 9- Bonds are safe. Fact- Bloomberg has reported that investors have poured US$480bn into debt funds in the two years ending June 2010 compared with US$496bn pumped into share funds from 1999 to 2000. When interest rates rise, the capital value of bonds will fall on a mark to market basis which will require an investor to hold the interest bearing deposit to maturity if they are not prepared to realise a capital loss. We hope you have enjoyed this 9 part series on the fallacies surrounding what are considered to be market truisms and we hope it has helped you to become a better informed investor. You can find more detail on each Truism in Current Articles or by searching through Articles Archive and for any other questions or queries please feel free to call or email me directly. At Newealth we are always looking to innovate and improve our ongoing services wherever possible and if you have any ideas or comments, please feel free to email me via ‘Contact Us’ at www.newealth.com.au or to call me on +61 2 9267 2322.
14th-March-2011 | 
