Myth #8: Strong demand for a
particular product or stock
market sector should see
stocks in the sector do well and
vice versa
While this might work over the long term, it
suffers from the same weakness as Myth #7.
By the time demand for a product (eg, new
residential homes) is really strong it should
already be factored into the share prices for
related stocks (eg, building material and home
building stocks) and thus they might even start
to start to anticipate a downturn.
Myth #9 Countries with
stronger economic growth will
see stronger equity market
returns
In principle this should be true as stronger
economic growth should drive stronger
revenue growth for companies and hence faster
profit growth. It’s the basic logic why emerging
market shares should outperform developed
market shares over time. But it’s not always
the case for the simple reason that often
companies in emerging countries may not be
focussed on maximising profits but rather may
be focussed on growing their market share or
social objectives such as strong employment
under the influence of their government.
Myth #10: Budget deficits drive
higher bond yields
are usually associated with recession or weak
economic growth and hence weak private
sector borrowing, falling inflation and falling
interest rates so that bond yields actually fall not
rise. This was evident in both the US and
Australia in the early 1990s recessions and
evident through the GFC that saw rising
budget deficits and yet falling bond yields.
Myth #11: Having a well
diversified portfolio means
that an investor can take on
more risk
This mistake was clear through the GFC. A
common strategy had been to build up more
diverse portfolios of investments with greater
exposure to alternative assets such as hedge
funds, commodities, direct property, credit,
infrastructure, timber, etc, that are supposedly
lowly correlated to shares and to each other.
Yes, there is a case for such alternatives, but last
decade this generally led to a reduced exposure
to truly defensive asset classes like government
bonds. So in effect, investors actually began
taking on more risk helped by the “comfort”
provided by greater diversification. But
unfortunately the GFC exposed the danger in
allowing such an approach to drive an
increased exposure to risky assets overall. Apart
from government bonds and cash, virtually all
assets felt the blow torch of the global financial
crisis, as supposedly low correlations amongst
them disappeared.
It's common sense that if the government is
borrowing more (higher budget deficits) then
this should push up interest rates (the cost of
debt) and vice versa, but it often doesn’t turn
out this way. Periods of rising budget deficits
10