3 Big Lies

So much of what you hear in the financial press these days is so wrong that one most financial television and print should consider only strictly for entertainment purposes. In this article we examine more great is constantly cycled through the so-called "experts."
Big Lie # 1: Buy Large Cap Stocks that pay dividends
The idea here is that you buy "feel good stocks" such as Coke, Wal-Mart, and Microsoft. The theory is that if these companies can not make it, and that even if one can not appreciate their shares, you will earn dividends on the money. But here's the real story:
- If you are the owner of Microsoft, you have not made money for the last seven years. But you have a dividend of 0.32% earned per year.
- Your shares in WalMart have been dead for six years, but paid a 1.12% annual dividend.
- Coke lost your 20% from January 2005 until January 2006, but paid a dividend 2.3%.
- Perennial tough IBM lost more than 25% from 2001 to 2006 but eked 0.90% in dividends.
I could go on and on, but you get the idea.
You will probably never go broke investing in large-cap, but you'll never be rich, either. In fact, you will be much to do just to keep up with inflation pace.
And if you have decided to go with a large cap mutual fund, you have 5.8% annualized return over the past five-year average. Not bad, but not great. At 6% per year, even in a tax-deferred retirement plan, it will ask for your money to double. Approximately 12 years Taking inflation into account, it will take over 20 years to double in today's dollars your money!
Big Lie # 2: Buy Mutual Funds
Mutual funds are cash cows for the financial sector, but they are full of problems for investors like you and me.
Between December 31, 1992 and December 31, 2002, 10 years we have enjoyed one of the greatest bull markets in history, nearly 80% of all mutual funds underperformed the market, costing investors billions of dollars in unclaimed winnings.
And you get to pay for underperforming the market.
On top of the fees, you get capital gains tax and the occasional scandal. All in all, not a very good deal.
The other major problem with mutual funds is that just like the stock selection, it is difficult in the right sector at the right time.
In 2005, Latin America and natural resources the big winners of the year were. In the past three years have been the top performers Natural Resources, Latin America and India. Over five years, the big money made in Eastern Europe, Russia and Precious Metals. So unless you have a crystal ball and can pick exactly in each year, the right sector you will, by definition, have some or all of your money underperforming the market at all times.
The only exception in the mutual fund swamp, the group enhanced index funds offered by Rydex and Profunds. These provide an opportunity to the performance of the major stock market indexes, either long or short double, and can increase your profits if properly marketed with a proven trading system.
But, fortunately, there is a better way and this development, the mutual fund industry run really, really scared.
Exchange Traded Funds, or ETFs, first appeared about five years ago and today are to steal money hand over fist from traditional funds.
This asset class is growing nearly 300% per year and it is easy to see why.
Exchange Traded Funds offer higher performance by simply following a market like we ¡| ve already seen, 80% of mutual funds underperform the market so that ETFs are better performers right off the bat.
ETFs trade like stocks, their costs are much lower and they have zero scandals. On top of that, you can major market indexes or you can trade sectors, such as precious metals, healthcare or internationally. All in all, Exchange Traded Funds offer an excellent alternative to mutual funds and we recommend that ETFs are a part of the portfolio of each investor.
Big Lie # 3: Buy Bonds
There is nothing wrong with buying bonds, as long as you realize that they are not the safe haven of the financial press is to be them.
Sure, they are backed by the full faith and credit of the U.S. government, but they come with a host of hidden risks that should be considered by any investor, especially those in or near retirement.
The standard rule of thumb is that an investor should allocate its assets by subtracting his age from 100 and then to the mix of stocks and bonds to determine. In its portfolio using that number
For example, a 55-year-old investor from 100 and come with 45. Off his age Therefore, to distribute 55% in bonds and 45% in equities portfolio.
The theory is that the older you get, the less stock market exposure you should have, because you have less time to recover in case of a market drop would have. This is good advice if you're after a buy and hold plan.
However, the danger of this plan is that as you get more and more money to allocate to bonds, you become more vulnerable to inflation. In today's world where the average person can expect to live for 20 years or more in retirement, inflation, market risk is not your worst enemy.
10 Year U.S. Treasury Bonds currently supply about 4.4%, not great when you consider that the cost of living increased by 2.5% per year.
It will be a huge nest to participate in a livable retirement income at a fixed eggs to make 4.4% and in twenty years, inflation-adjusted bonds, your income will be reduced by more than 50%.
Another gruesome risk of bonds is interest rate risk. If interest rates rise bond prices fall, in other words, your nest egg falling in value when interest rates rise environment. That will not matter if you can hang on until the bond, but that could be ten, twenty or even thirty years from now.
What would happen if unexpected illness or financial forced you to cash in your bond before maturity? If interest rates have risen since you bought, you will lose money.
How safe is that?
The only sensible solution for an investor today is to protect, feed themselves and find a better way to his wealth and grow. There are a number of proven options available, but the absolute worst thing one can do is listen to the experts who tell you to "buy buy large caps, buy mutual funds and bonds."
Copyright 2006 Equitrend, Inc.

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