3 Big Lies

Title: 3 Big Lies Word Count: 1107 Author: John M. McClure Email: etfinancearticles@yahoo.com Article URL: www.submityourarticle.com/articles/easypublish.php?art_id=7019

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3 Big Lies Copyright 2006 Equitrend, Inc.

So much of what you hear in the financial press these days is so wrong, that one must consider most financial television and print to be strictly for entertainment purposes only. In this article, we're going to examine more big lies constantly being pedaled by the so called "experts."

Big Lie #1: Buy Large Cap Stocks that Pay Dividends

The idea here is that you're buying "feel good stocks" like Coke, Wal-Mart, and Microsoft. The theory is that if these companies can't make it, no one can and that even if their shares don't appreciate, you'll make money on the dividends. But here's the real story:

--If you own Microsoft, you haven't made any money for the last seven years. But you have earned a dividend of .32% per year.

--Your shares in WalMart have been dead for six years but paid a 1.12% annual dividend.

--Coke lost you 20% from January, 2005, to January, 2006, but paid a 2.3% dividend.

--Perennial stalwart IBM lost more than 25% from 2001 to 2006 but eked out .90% in dividends.

I could go on and on, but you get the idea.

You'll probably never go broke investing in large caps, but you'll never get rich either. In fact, you'll be doing great just to keep up with inflation.

And if you decided to go with a large cap mutual fund, you've averaged 5.8% annualized returns over the last five years. Not terrible, but not great either. At 6% per year, even in a tax deferred retirement plan, it'll take you about 12 years to double your money. Taking inflation into account, it will take more than 20 years to double your money in today's dollars!

Big Lie #2: Buy Mutual Funds

Mutual funds are cash cows for the financial industry but they're rife with problems for investors like you and me.

Between December 31, 1992, and December 31, 2002, 10 years during which we enjoyed one of the biggest bull markets in history, nearly 80% of all mutual funds underperformed the market, costing investors billions of dollars in unclaimed profits.

And you get to pay for underperforming the market.

On top of the fees, you get capital gains taxes and the occasional scandal. All in all, not a very good deal.

The other major problem with mutual funds is that like stock picking, it's tough to be in the right sector at the right time.

In 2005, Latin America and Natural Resources were the big one year winners. Over the past three years, the top performers have been Natural Resources, Latin America and India. Over five years, the big money was made in Eastern Europe, Russia and Precious Metals. So unless you have a crystal ball and can pick the exact right sector to be in every year, you will, by definition, have some or all of your money underperforming the market at all times.

The one exception in the mutual fund morass is the group of enhanced index funds offered by Rydex and ProFunds. These offer an opportunity to double the performance of major market indices, either long or short, and can amplify your gains if traded properly with a proven trading system.

But, fortunately, there is a better way and this development has the mutual fund industry running really, really scared.

Exchange Traded Funds, or ETFs, first appeared about five years ago and today are stealing money hand over fist from traditional funds.

This asset class is growing almost 300% a year and it's easy to see why.

Exchange Traded Funds offer higher performance by simply tracking a market; as weˇ¦ve already seen, 80% of mutual funds under perform the market so ETFs are better performers right off the bat.

ETFs trade like stocks, their expenses are far lower and they have zero scandals. On top of that, you can trade major market indices or you can trade sectors like precious metals, health care or international. All in all, Exchange Traded Funds offer an excellent alternative to mutual funds and we recommend that ETFs be a part of every investor's portfolio.

Big Lie #3: Buy Bonds

There's nothing wrong with buying bonds as long as you realize they're not the safe haven the financial press makes them out to be.

Sure, they're backed by the full faith and credit of the U.S. government, but they come with a host of insidious risks that need to be considered by every investor, particularly those nearing or in retirement.

The standard rule of thumb is that an investor should allocate his assets by subtracting his age from 100 and then using that number to determine the mix of stocks and bonds in his portfolio.

For instance, a 55 year old investor would subtract his age from 100 and come up with 45. Therefore, his portfolio should be divided 55% in bonds and 45% in stocks.

The theory is that the older you get, the less stock market exposure you should have since you would have less time to recover in the event of a market drop. This is sound advice if you're following a buy and hold plan.

However, the danger of this plan is that as you allocate more and more money to bonds, you become increasingly vulnerable to inflation. In today's world where the average person can expect to live for 20 years or longer in retirement, inflation, not market risk is your worst enemy.

10 Year U.S. Treasury Bonds currently yield around 4.4%, not great when you consider that the cost of living is rising 2.5% a year.

It'll take a huge nest egg to make a livable retirement income on a fixed 4.4%, and in twenty years, your inflation adjusted bond income will be cut by more than 50%.

Another horrific risk of bonds is interest rate exposure. As rates rise, bond prices drop; in other words, your nest egg declines in value in a rising interest rate environment. That won't matter if you can hang on until the bond matures, but that could be ten, twenty or even thirty years from now.

What would happen if unexpected illness or financial need 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 sane solution for an investor today is to educate himself and find a better way to protect and grow his wealth. There are a number of proven options available, but the absolute worst thing one can do is listen to the pundits who tell you to "buy large caps, buy mutual funds and buy bonds."

About the Author:

John M. McClure is CEO and President of EquiTrend Inc., a stock market timing system that averages 42% profits per year. Mr. McClure is also a Registered Investment Advisor and President of the National Association of Active Investment Managers. www.equitrend.com