Full disclosure – I have no way of truly confirming this is investing’s greatest myth but I certainly see a lot of financial press coverage of this area and an implications the myth exists and is widely believed. The myth is that stock market returns correlate to the growth or decline of the economy. Other than over very long time horizons this is completely false. This article dispels the myth based on a historical review of GDP (Gross Domestic Product) and stock market growth in the US.
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“One thing I love about customers is that they are divinely discontent.
Their expectations are never static – they go up!”
~ founder of Amazon ~
There is one tool constantly discussed and reported on in the financial press that you may be surprised actually doesn’t work all that well when it comes to long term investing It’s called economic forecasting.
John Kenneth Galbraith was a Harvard economist that after years of study concluded, “The only function of economic forecasting is to make astrology look respectable.”
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I just finished reading Richard Thaler’s book called “Misbehaving” which reviews the history and studies done on Behaviourial Economics – how human behaviour (regarding financial decisions) effects the economy. Richard coined a phrase called “myopic loss aversion” which suggests the more we look at our portfolio, the more we are likely to focus on the losses (due to the constant but temporary volatility) the more we see losses, the more we experience loss aversion and the greater the chance we’ll do something typically not best for our long term success. If you are looking at your portfolio more than once a quarter and finding you get upset at what you see, I recommend you read this article from Ben Carlson.