Having taken a nice nap, I figured it was time to be back for more myths of investing. Having taken a glance at the SGX earlier on, I don't think there needs to be any adjustment for the day.
Myth #7 Strong economic growth and strong profit growth are good for stocks and poor economic growth and falling profits are bad
Generally true over the long term, but at cyclical extremes it is usually wrong and a big mistake. The crucial point according to the article is that stock markets are forward looking, so when data is really strong, due to strong economic data, the market has probably already factored it in. In fact, there may already be fear in the market about rising cost pressures and rising short term interest rates.
An interesting point to note in the article is the example of the bottoming out of the bear market in 2003, where global economic indicators were very poor and a general fear was off a "double dip" back into global recession. Despite this, stocks turned around, with better economic and profit news only coming later in the year.
Which leads me to relate to the present and I personally feel that markets would not dip back to sub 2000 levels (SGX) but continue from a slow upward climb to breach 2600 levels by end of 3rd quarter. That is..no major event further disrupting the recovery.
Myth #8 Strong demand for a particular product produced by a stock market sector should see stocks in the sector do well and vice versa
Nearly similar to #7, any good data for that sector should have already been reflected in the stock prices before the masses get hold of any news, which leads me to question the varying degrees of efficiency in the market, and whether it is actually possible to beat the market consistently. I shall attempt to touch on that in a later entry.
Myth #9 Having a well diversified portfolio means that an investor is free to take on more risk
Oliver comments that the common strategy to build up diverse porfolios less dependent on equities with greater exposure to things like hedge funds, commodities, direct property or infrastructure may in fact, cause the investor to avoid truly defensive asset classes such as government bonds. A diverse collection of risky assets apparently do not reduce overall portfolio risk but increase risk exposure overall, especially in the recent years and the global crisis, which basically affected most asset classes anyway.
Myth #10 Tax should be the key driver of investment decisions
Afterall, level of tax tapers off after a certain level of investment right? Hence, decisions to invest should be based on that. Probably to a certain extent, but the first priority should always be the value of the investment and the fundamentals of a company, not how much tax refund you can get.
Myth #11 Experts can tell you where the market is going
Bottom line: No one has a perfect crystal ball. Forecasts for economic indicators are useful but need to be treated with care. The key value in investment experts' analysis and forecasts is to get a idea on all issues surrounding the market and understand the general consensus. Experts are also useful in placing current events in their historical contexts, and this can provide valuable insights for investors in terms of market potential.
I was just telling my friend the other day that economic analysts basically were putting nothing across in the best way possible, because stock markets are volatile and no one can give a definite answer on how the market moves. It is afterall, just a prediction based on current values and information.
Ok, have finally touched on all the myths that the article has covered. Generally, these are pointers pointing toward market sentiment and crowd behavior, something commonly seen these days, especially in this so called 'bear market rally'. Just be careful and don't go too much with the crowd.
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