Friday, March 20, 2009

The Number One Wall Street Myth

Despite the stock market carnage of the past year and a half, there is still one Wall Street myth which continues to live on. That myth is to invest in stocks for the "long term".

When a person hears those words from their financial advisor or broker, they should immediately ask their advisor one question. That question should be - what is your definition of the "long-term"?

How the advisor answers the question will tell you if the advisor is trustworthy or not. If the advisor defines "long-term" as 25-30 years, then they are trustworthy. If they define "long-term" as any shorter period of time, then they are giving you BS and are trying to sell you something on which they will collect commissions or fees.

The dirty little secret that people who work on Wall Street do not like to tell their clients is that stocks move up and down in long cycles of roughly 20 years in length.

Here are some examples: Anyone who bought stocks in 1929 did not reach breakeven until 1956! Anyone who bought stocks in 1966 did not reach breakeven until 1983!

Since stocks are now back to levels seen in 1997, it looks like we are in the midst of one of those long down-cycles for stocks.

So if you are young and have at least 20 years of "investing life" before you will need the money, by all means invest for the "long-term". However, if you will need your money in a decade or so, you should take a long hard look at your current portfolio allocation. In many cases, changes should be made.

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