TODAY WE explode popular financial myths:
Myth: "The stock market will tumble because what goes up must come down."
That principle describes gravity, but laws of physics do not apply to Wall Street. We may suffer down drafts -- the Dow Jones average fell 710 points, or 10.1 percent, a few months ago, then climbed to a record high -- but no law dictates that stocks must crash. As the economy grows, stock prices will probably move higher.
Regarding the above, a semi-friend chided me about the 7.5 percent plunge of Intel, one of my favorites, last Friday. He overlooked this fact: From its 1990 low to its 1997 high, Intel vaulted 2,325 percent.
Myth: "You cannot make money in bonds."
Although stocks have outperformed bonds over 75 years, there is a case for bonds.
Treasuries yield around 7 percent, double the inflation rate and almost triple average stock returns, now at a 1.9 percent historic low. Further, interest from Treasuries is free of state and local taxes. Also, if we slip into a recession the Fed could lower interest rates, forcing long-term Treasuries' prices higher. I suggest a "laddered" Treasury portfolio.
Myth: "When shopping for a money market fund, always put money in the fund with the highest yield."
Be careful. To "beef up" returns, some "high-yield" money funds purchase low-grade, risky and very long-term securities -- a bad strategy. Read the prospectus carefully. Don't stretch for yield. You don't want to take risks in a money fund.
Myth: "A strong U.S. dollar helps all U.S. citizens."
A strong dollar sounds good and lowers foreign travel costs, but it makes U.S. exports more expensive than exports of other countries.
Myth: "Become more conservative as you near retirement." Fact: You may live another 20-30 years, so at only 3 percent inflation your current $60,000 annual expenses will rise to $100,000 in 20 years.
Myth: "Always sell a stock on bad news." Fact: If you own a stock because you think it's a good value, don't dump it on one negative earnings surprise. Be patient.
Myth: "Stocks are so high now there are no 'income' stocks any more." Fact: Utilities, oil companies, regional phone companies and real estate investment trusts (REITs) provide above-average income.
Pub Date: 6/04/97