ALAN S. MOORE

Exploding the stock market’s modern mythology In ancient times, when human beings had difficulty comprehending the laws of nature, they made up stories, or myths, to explain the world around them. In a way, that’s how modern folks interpret today’s stock market. They create myths to deal with what they don’t fully understand. Here are a few of the most common ones. Myth No. 1: The stock market is too dangerous. Potential investors avoid the stock market because they fear a recession, the possible consequences of a change in Presidential administration, or the fluctuations of the federal budget deficit. No matter what the situation, some people always find a reason not to invest. Instead, they limit themselves to conservative fixed income investments. But in reality, these investments carry risks of their own, like the risk of not keeping up with inflation. While the market will certainly have its down years, it has averaged returns of more than 10 percent since 1926. With a qualified financial advisor and a long-term investment plan, you will probably do better investing in the stock market than with other investment options. Myth No. 2: Magazines give the best stock tips. Many investors choose their stocks based on what they read in financial or news magazines. Unfortunately, by the time a stock has reached the point where it’s touted in major periodicals, it is usually past its peak. And, by the time the new investor buys in, the stock is already on the down slide. An investment should be chosen based on what it adds to your portfolio. Popular magazines will not be able to give you that advice. Myth No. 3: You can consistently time the stock market. Some impatient investors jump from stock to stock, betting on the latest trend in the market. While these investors sometimes get lucky with a big winner, they often ride some big losers too. In most cases the losses and wins offset each another, leading to overall mediocre performance. For example, a 10 percent growth rate for each of three years will outperform two 25 percent growth years and a subsequent 25 percent loss. Being patient and sticking to a consistent, well researched investment plan can result in a superior performance over investing trend-by-trend. Staying invested for the long term provides your best opportunity for gains. Myth No. 4: Anybody can get lucky in the stock market. We all remember the story of Icarus, who, ignoring sound advice, flew too close to the sun, melted his wings, and plunged to his demise. The modern day Icarus is the investor who fails to do his or her own research or to heed the advice of professional financial advisors. Instead, this individual invests blindly on a whim or on a hot tip received from a well-intentioned, but often misinformed, friend or business associate. While this strategy may pay off occasionally at the race track, it rarely works well in the stock market. Myth No. 5: Success in the stock market is more important than personal needs and objectives. Today, some investors become so attached to the Calypso-like stock market that they forget why they’ve invested in the first place. Instead of getting out when they reach their initial investment goal, they hang on until their portfolio suffers. Or, worse yet, they became so confident in the investment success they’ve enjoyed that they forget about their objectives and risk tolerance, and eventually squander their gains. Staying focused on your goals. If your goals have changed, work with your financial advisor to develop a new plan. Does your investment strategy fit any of these scenarios? Do you avoid the market completely because it’s too dangerous, or do you constantly try to time the market? Does your investment advice come from magazines or hot tips, or do you stay fully invested when you should get out? Whatever your situation, it’s important not to fall prey to stock market myths, but rather keep a realistic perspective regarding your assets, your needs, and your tolerance for risk. A professional financial advisor will work with you to establish a plan to help you meet your needs while maintaining your tolerance for risk. ALAN S MOORE is a Financial Advisor of Legg Mason Wood Walker, Inc., a diversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc.