Saturday, March 28, 2009

Don't Fall Victim to these 5 Wall Street Lies

Don't Fall Victim to these 5 Wall Street Lies
By Keith Fitz-Gerald

What Got Us Here?
As we watch the government and Wall Street scramble to repair the economic mess we're in, it's more important than ever to understand exactly what got us in this situation in the first place.

Even if you're on the investing sidelines right now, looking at how we got here can help you avoid repeating past mistakes, learn how to spot future red flags and repair and grow your portfolio.

So, what got us here?

And how do we steer clear of such drastic losses in the future?

There are a few pieces of advice that Wall Street kept pitching to investors as gospel truth that I refer to as "Wall Street's biggest whoppers."

Wall Street Lie #1: Buy and Hold
It's a simple-enough concept: Consistently invest in the market and let it ride. You'll be laughing all the way to the bank. How could you go wrong?

In reality, "buy and hope" – a far better name for this myth – is one of Wall Street's favorite strategies.

Win or lose, brokers never want you to stop playing the game. So the collective "they" pitch you on a hot investment to get you hooked and then keep stringing you along.

To further increase the risk, ratings agencies that are in bed with certain companies will give the green light on investments that are anything but safe.

Of course, the rude awakening comes when the market goes through one of its frequent periods of readjustment.

Timing really is everything, isn't it?

What to Do Now
Just because you may have some time before you'll need the money does not necessarily mean you should take on more risk. A better strategy is to base choices on the certainty of returns – especially in this investing climate. At this point, boring is good!

Look at dividends and reinvestment for stable returns.
Stay with businesses that have proven management, plenty of free cash flow and increasing dividends that are backed up by unstoppable global trends.
Do your homework, and you'll find there are still plenty of solid investing options – just be selective!

Wall Street Lie #2: Some Debt Is Good
One of Wall Street's biggest (and most dangerous) lies is that debt is an appropriate tool for building wealth.

Here's the bottom line…

If you owe someone money, you've still got to pay it off eventually. That means any growth you attribute to debt until it's paid off in full exists only in fantasyland. How do you think General Motors and Lehman Brothers got into so much trouble?

It's no different for personal portfolios. Maybe if our leaders had understood this in the first place, millions of investors would not have been taken on a white-knuckle ride.

Even those who act responsibly are finding out that we're now liable for the "other" guys' debts, too.

What to Do Now
As an investor:

Only stick with companies that have little or no debt. Avoid any that are getting life support from the Federal Reserve – it's too shaky to assume they'll be able to stand on their own two feet once the crutch of government financing is taken away.
In your personal life:

Borrow only if you have to and on the conservative side.
Refinance your house by taking advantage of low interest rates before they start rising again.
Pay off your credit cards each month.
If you have trouble with plastic, shift to a cash-only lifestyle for a while.
And make sure that any new debt you take on is debt you can afford to pay off.

Wall Street Lie #3: It Pays to Diversify
Common investing wisdom touts spreading your money around as a safety precaution.

In reality, this is no more effective than rearranging the deck chairs on the Titanic. It's best to just get off the boat.

Instead, a "safety first" strategy is far more stable and generates some impressive returns by emphasizing high current income and long-term appreciation.

Many investors don't understand the name of the game right now, incorrectly believing investing in a recession is an all-or-nothing equation. They're wrong.

What to Do Now
In a time when so many markets – stock, bond, housing and credit – have collapsed simultaneously, it is crucial to hedge your portfolio at all times and not just when it's popular.

Skew your investments toward safety first. You can still allow yourself to screw up on speculative bets, but you won't be dependent on them to make up for losses.
Look into specialized tools, such as inverse funds or options, for low-risk choices with an upside. After all, the name of the game is planning for the worst while still obtaining the best of what's out there.

Wall Street Lie #4: Your Home Is an Investment
Actually, it's not.

A house is really a roof over your head that shields you from being priced out of the local rental markets.

Or, at worst, it's a money pit that provides you with the illusion that you're doing something sensible with your hard-earned money – despite the fact that an entire industry would have you believe otherwise.

Research shows that since 1900, home prices have run sideways or declined for long periods of time. What that means is real estate hasn't been the golden investment everyone claims it is.

Sadly, millions are learning the hard way right now that real estate can, and does, lose value.

Wall Street Lie #5: Shop 'til You Drop and Save the Economy
Have you heard?

It's our new patriotic duty to go out and spend money.

Not only does the U.S. government want you to go on a spending spree, but Wall Street and the credit card companies are also looking to you to save their sorry hides by helping you do just that.

That's why the stimulus plans – you know, the ones designed to give you relief during a recession – revolve around tax cuts and handouts. It's mere window dressing.

Here's the bottom line…

Nothing will matter until the banks start lending again. Period.

What to Do Now
People talk about our current situation as though it is an enigma, but that's simply because only a precious few people actually remember similar events in the past. For example, the Panic of 1873 (often referred to as the "real" Great Depression), the Great Financial Crisis of 1914 and the Banking Crisis of 1931.

So, what can you do?

Keep your powder dry. Misguided though our economic policies may be, savvy investors should plan for an eventual rebound – even if we're destined to test new lows in the months ahead.

Don't fall victim to Wall Street's lies, and you'll be able to come out ahead when it finally does.