Quiz | March 2011

Wall Street Truth or Bunk: Can You Tell the Difference?

By Bob Frick

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Wall Street lore is filled with proverbs that purport to be sound rules for investing your money. But how true are these truisms? Here are ten investing maxims often quoted by market analysts, traders and investors. See whether you can separate the myths from the advice you can bank on.

Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 1 of 10

Buy stocks when there’s "blood in the streets."

A. Truth
B. Bunk

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 1 of 10

Buy stocks when there’s "blood in the streets."

You're right! A. Truth is correct.

Sorry, wrong!  is incorrect.

The right answer is A. Truth.

Having the stomach to buy undervalued equities in the scariest of downturns has long worked wonders for contrarian investors, from John D. Rockefeller to Warren Buffett. You need only look back to March 5, 2009, when negative market sentiment, as measured by the American Association of Individual Investors, hit the highest level ever recorded. Four days later, Standard & Poor’s 500-stock index bottomed after declining 55% in 18 months and embarked on a recovery that has lifted the benchmark 71.6% through August 4, 2010.

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 2 of 10

Sell in May and go away.

A. Truth
B. Bunk

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 2 of 10

Sell in May and go away.

You're right! A. Truth is correct.

Sorry, wrong!  is incorrect.

The right answer is A. Truth.

Since 1950, the Dow Jones industrial average has gained, on average, 7.4% from November through April versus just 0.4% from May through October. The adage advises investors to unload their stocks to dodge the losing months and buy again after Halloween (hence this phenomenon alternatively being called the “Halloween indicator”). But just because it rhymes doesn’t mean it’s always true. For example, if you had bought stocks on Halloween in 2008 and sold on May 1, 2009, you’d have experienced the Dow’s 9% loss for that period. And if you had stayed out of the market through October, you’d have missed out on the index’s 20% gain.

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 3 of 10

The percentage of stocks in your portfolio should be equal to 100 minus your age. So if you are 40 years old, 60% of your portfolio should be in stocks. If you are 65, then you should have 35% in stocks, with 65% in bonds and cash.

A. Truth
B. Bunk

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 3 of 10

The percentage of stocks in your portfolio should be equal to 100 minus your age. So if you are 40 years old, 60% of your portfolio should be in stocks. If you are 65, then you should have 35% in stocks, with 65% in bonds and cash.

You're right! B. Bunk is correct.

Sorry, wrong!  is incorrect.

The right answer is B. Bunk.

The logic here is that you should keep most of your money in stocks and the rest in bonds and cash when you’re younger and can weather the ups and downs of the stock market -- and don’t need the income from bonds. As you reach middle age, you should have less of your money in stocks and more in bonds to help solidify your next egg. When you retire, you should still keep some stocks for growth so your nest egg doesn’t disappear before you do. So, you can use this equation as a rough guideline. But remember to consider more than just your age when you build your portfolio; think about your investing experience or how comfortable you are with risk, for example.

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 4 of 10

Bonds are always a safe investment.

A. Truth
B. Bunk

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 4 of 10

Bonds are always a safe investment.

You're right! B. Bunk is correct.

Sorry, wrong!  is incorrect.

The right answer is B. Bunk.

Investing in bonds is certainly a good way of diversifying your portfolio to mitigate risk. But even supposedly super-safe Treasury bonds come with risks. The Federal Reserve has pushed bank interest rates to historic lows in an effort to revive the economy -- meaning rates have nowhere to go but up. And when interest rates rise, bond prices fall. Plus, issuers of corporate, foreign and municipal bonds that stumble through a slow recovery, or possible double-dip recession, run the risk of defaulting on their debts.

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Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 5 of 10

Stocks that split in price will rise in price, too.

A. Truth
B. Bunk

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 5 of 10

Stocks that split in price will rise in price, too.

You're right! B. Bunk is correct.

Sorry, wrong!  is incorrect.

The right answer is B. Bunk.

A typical stock split means you get two $50 shares for the single $100 share you used to own. In the past, when stocks were more often traded in blocks of 100 and broker commissions were much higher than they are today, a stock split made it cheaper for small-time investors to buy in. This increased liquidity and often boosted share prices in the short term. But with the rise of computerized trading, companies split stock prices generally because they fear the price has already risen beyond a range where the investing public is comfortable.

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 6 of 10

Adding risky investments can make your portfolio less risky.

A. Truth
B. Bunk

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 6 of 10

Adding risky investments can make your portfolio less risky.

You're right! A. Truth is correct.

Sorry, wrong!  is incorrect.

The right answer is A. Truth.

For example, say you have all your money in large-company U.S. stocks, and you add a more-volatile commodities fund to your portfolio. The addition decreases the portfolio’s overall volatility because the movements of the two types of investments aren’t closely linked and can offset each other. So while one rises, the other could fall, and the net effect is less risk. The trick is to learn to look at your portfolio’s ups and downs as a whole -- and not panic and sell a single investment when it drops.

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 7 of 10

You should keep about 5% of your assets in gold.

A. Truth
B. Bunk

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 7 of 10

You should keep about 5% of your assets in gold.

You're right! A. Truth is correct.

Sorry, wrong!  is incorrect.

The right answer is A. Truth.

We at Kiplinger’s Personal Finance have long been cautious about gold as an investment. The price of the precious metal is notoriously volatile and does not reliably keep up with inflation. It’s a commodity, so it doesn’t pay interest or dividends, and it lags the returns of stocks and bonds over long periods. But gold’s price often rises during times of crisis when stocks drop or meander -- witness the 338% increase in the price of gold over the past decade. The metal can provide ballast to offset losses in equities during bear markets. If you find gold alluring and comforting, by all means own a little. But don’t expect to get rich on it.

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 8 of 10

A Super Bowl win for an original American Football League team foreshadows a decline in the stock market for the year, and a win for an original National Football League team means the market will be up.

A. Truth
B. Bunk

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 8 of 10

A Super Bowl win for an original American Football League team foreshadows a decline in the stock market for the year, and a win for an original National Football League team means the market will be up.

You're right! B. Bunk is correct.

Sorry, wrong!  is incorrect.

The right answer is B. Bunk.

It’s true that this oft-cited “Super Bowl Indicator” has worked about 80% of the time through history. But when it hasn’t worked, the results have been disastrous. For example, though a Giants victory in 2008 foretold a market rise for the year, the team’s huge upset over the Patriots came with a 34% loss for the Dow. Beware of such purely random indicators. You’d do as well with market advice from a soothsayer.

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 9 of 10

Bank on a market rally every January, especially in small-company stocks.

A. Truth
B. Bunk

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 9 of 10

Bank on a market rally every January, especially in small-company stocks.

You're right! B. Bunk is correct.

Sorry, wrong!  is incorrect.

The right answer is B. Bunk.

The so-called “January effect” once was a remarkably reliable barometer of market performance, most likely because of stockholders’ tendency to sell stocks for losses at the end of December and then buy them back in January, especially early in January. But as with all inefficiencies in the market that are widely publicized, investors have learned about it and adjusted their trading to diminish the effect. Plus, with more people investing through tax-sheltered retirement plans, fewer folks are selling for a tax loss at the end of the year. Beware as well of the also-suspect “January Indicator,” which suggests that the market’s full-year results will fall in line with its January performance.

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 10 of 10

If you’re a retail investor and you’re lucky enough to get in on an initial public offering (IPO), hold on to your wallet. You’re probably at high risk.

A. Truth
B. Bunk

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?

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Question 10 of 10

If you’re a retail investor and you’re lucky enough to get in on an initial public offering (IPO), hold on to your wallet. You’re probably at high risk.

You're right! A. Truth is correct.

Sorry, wrong!  is incorrect.

The right answer is A. Truth.

If you find an opportunity with an initial public offering (when a company’s stock first trades publicly), the rewards could be great -- some have a strong initial rise and keep rising. But the odds of swift and simple success are against you. For one thing, the best initial public offerings are first available to large institutions, such as pension funds, banks and money-management firms. For another, IPOs have a decidedly mixed track record. Many peter out after an initial rise. If you want to try your hand at IPOs, you may have a shot at getting into good deals through some online brokers, but we suggest you tread carefully. See our Midyear IPO Outlook for more information.

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Quiz

Wall Street Truth or Bunk: Can You Tell the Difference?