Economy turns “truths” to myths
For a long time, a lot of us shared some assumptions about the economy.
Real estate won't lose value. Life insurance isn't a good investment. A near-perfect credit score will get you the best interest rate.
But this recession is turning a lot of those "truths" on their head. Kiplinger.com outlines 10 financial myths that have been exposed by the sour economy. Here's one:
MYTH 2: Real estate behaves differently from other investments. Call it a bubble instead of a boom if you like, but it was supposed to be "proof" that real estate returns don't strongly correlate with the returns of stocks and other financial investments. The message: Rental properties or real estate investment trusts can make money despite drops in Standard & Poor's 500-stock index or the Nasdaq. Wrong. REITs lost 38% in 2008 because the credit crunch and overly aggressive expansion plans hammered profits and dividends. REIT returns used to have little correlation with the stock market. Now they closely track it.
Truth: Real estate won't overcome other risks when credit problems are harming all investments.
You can read the full list here.
Among the other myths busted: Gold is the best place to hide in a lousy economy; the dollar is in deep trouble; and mass layoffs are a good way for company to raise its stock price.
MYTH 8. Mass layoffs reward investors. In the 1990s, news of layoffs would boost a company's stock for several weeks. Stock traders lauded bosses for tightening their belts, so it was smart to buy or hold the shares. But mass firings no longer impress investors. Lately, firms as varied as Allstate, Boeing, Caterpillar, Dell, Macy's, Mattel and Starbucks have all announced enormous layoffs -- only to learn that, if anything, doing so spooks the market even more. For example, on the day in January when Allstate axed 1,000 of its 70,000 employees, its shares fell 21%.
Truth: Don't buy a stock thinking that a layoff will help profits. More likely, trouble's brewing.
Maybe that will prompt companies to hang onto a few more workers through the down times. It's hard to see people out of work in these times, and if there's a disincentive for laying people off, we're all for it.
What "eternal verities" about the economy have you seen fall by the wayside?