There are lots of urban myths out there, ideas that have no basis in reality, but that many people believe. Things like buildings in Los Angeles are built on rollers so they won’t collapse in an earthquake. Or my favorite, that someone named Thomas Crapper invented the flush toilet. Here are a few investing myths that I run into pretty frequently.
Investment returns of 10% a month are possible.
Wade Cook (for one), a popular seller of expensive classes about stock options says this kind of thing all the time. But no one has ever put up those kinds of numbers consistently. If you averaged 10% a month with $100,000 investment it would grow to $800 trillion in 20 years, more than the combined wealth of everyone in the world. In fact a consistent return of 2% a month is virtually unheard of. Warren Buffett, one of the richest men in the world averaged about 1.8% a month for 20 years. 1% a month is a very respectable return.
No-load mutual funds have no fees
No-load mutual funds charge no commissions, but they are hardly free of management fees. The average charge for a no-load fund is about 1% a year, about the same as you pay for a professional money manager like me. The difference is that mutual funds hide the charges. If a fund is up 10% for the year, they report it as a 9% gain and keep the other 1% for themselves. If it’s down 10%, they report it as down 11% and keep 1% again. No mutual funds are managed for free. It’s just that some don’t have you pay a sales commission as well as the management fee.
If the market is up in January, it will be a good year
People look for these types of coincidences all the time. The Santa Claus rally, the summer rally, blue Monday, etc. What these are are statistical coincidences or anomalies. They don’t predict anything. It’s like 3 days in a row and a car drives by right when you walk outside. Surely no one believes they are causing cars to drive by walking outdoors. Yet people invest their hard earned money based on these same types of coincidences.
Urban myths can be fun sometimes (ala Mr. Crapper). But we should all have the facts straight when we have real money on the line, and not let an urban myth lead us astray.