Common Market Misconceptions

1. Cash is the safest place to be. When conditions are uncertain, investors tend to migrate from riskier assets to cash and cash equivalents. While there is some safety in holding cash, it should only be part of a well-diversified portfolio, as cash provides zero interest and produces a negative return on an after-tax, after-inflation basis.
2. Stocks are too risky. Yes, the first 10 years of this century have been dubbed the "lost decade" for stocks, having provided investors with negligible returns. But investors must understand that "checking out" of equities could mean missed opportunities, and also that not all stocks are created equal.  It is not just about the highest yields, but also the focus on high-quality companies that can ride out volatility and ideally have growing dividends.
3. Income is only important for retirees. There's no doubt that income is critical in retirement, once investors have foregone a regular paycheck, but it is also a powerful wealth builder once they are still working. Investors may be surprised to learn that income historically has accounted for a large percentage of investment returns: over the past 85 years, dividends made up 43% of stock returns and coupons accounted for nearly 90% of bond returns.
4. Better wait for markets to settle down before making changes. Investors probably feel like they have been on a roller coaster since the 2008 financial crisis, and at this point are waiting for things to settle down. However, it's important to know they are missing out on opportunities with that mindset. S&P 500 equity valuations, although they've increased double-digits so far in 2012 and over 100% since their crisis low in March 2009, are still quite reasonable, particularly compared to bonds. And interestingly, equity market volatility, while it may feel bad, is close to historic norms.
5. Inflation is not a concern today. While inflation has been moderate in recent years, it would be a mistake to underestimate its erosive powers, especially with bond yields as low as they are. While inflation may be tough to notice on a one-, two- or three-year basis, BlackRock research has shown that annual inflation of just 3% can reduce the purchasing power of a portfolio by 50% over a 25-year timeframe.
6. Diversified? Yes, I hold an assortment of stocks and bonds. In the new world of investing, exposure to just stocks, bonds and cash is no longer enough. Diversification requires an allocation to non-traditional or alternative investments which tend to have lower correlations to traditional assets. While such diversification cannot ensure a profit or prevent a loss, it has been shown to smooth the ride over time. 

Source:  BlackRock

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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