Four Big Investment Myths
Market myths and half‐truths abound in the stock market. Much of what people think they know
Myth 1: Buy Low and Sell High
A cheap or falling stock is usually no bargain. It might just a weak one. Just because a stock fell from $40 to $20 does not mean it will ever reach $40 again. It is frequently better to buy those stocks that are moving higher. That’s because stocks tend to move in cycles and those that are rising tend to continue to rise. Those that are falling tend to continue to fall.
Myth 2: Buy and Hold
This recommendation frequently makes sense, but not if carried to extremes. It ’s true that many excellent stocks drop and then recover after a few months. But others take five years or longer to recover, and some never do. If you made a mistake, sell the problem stock or fund and move on.
Myth 3: Be Conservative as You Age
Conventional wisdom says that you should become more conservative as you get older. A common rule of thumb is that the percent of your investments in bonds should equal your age, and the remaining money placed in equity (stocks and stock funds). At age 60, you would have 60% in bonds, 40% in stocks. While you might want to become more conservative as you get older, age should not drive your investment strategy. Instead, your objectives should determine your investment strategy. If
Letting age drive your investment strategy –
Myth 4: Look at P/E Ratio
A favorite tool of investors is the P/E ratio. This is
But there are two problems with this approach:
1. A low P/E means that the stock price dropped, and perhaps with good reason. If so, it might also have little prospect of recovering. (See Myth 1.)
2. There are many good companies with consistently high P/E ratios.
Here’s a better tool. Rather than looking at just the P/E ratio, look at the P/E/G ratio. This is the P/E
As an example, consider two companies, A & B,
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