Big Lie No. 3: Buy and holdAnyone who has followed this advice since the late 1990s now feels deceived. "Buy and hold" once seemed so obvious. Over the long haul, stocks advance 10% to 12% a year, goes the mantra. So you can't ever go wrong adding money to stock funds -- as long as you don't act like a wild day trader.
The problem was that investors and financial advisers use an assessment of risk tolerance to determine exposure to various asset classes like stocks, bonds and cash.
Then the level of risk in the stock market changed violently. But investors -- or their financial advisers -- didn't adjust their portfolios away from stocks toward safer assets like cash, says Axel Merk of Merk Mutual Funds in Palo Alto, Calif. "If the risks in the markets change, your investment allocations must also change," he says.
- Talk back: What have you learned from tough times?
But how were we supposed to know that the risks of owning stocks had increased?
One early signal began to emerge in 2007, when market volatility started to increase rapidly, Merk says. Another sign was that excessive debt throughout the system had driven corporate profits to abnormally high levels, setting up investors for a big fall, says money manager John Hussman, the president of the Hussman Investment Trust.
Hussman warned investors of this risk early on. But, he says, because of Big Lie No. 2, many experts and Wall Street professionals "were unwilling to entertain any concern that threatened to stop the gravy train."
Big Lie No. 4: Overpaid CEOs are worth the moneyWhenever I write about greedy CEOs who get paid too much, company PR machines trot out the old saw that pay has to be so high "to attract the best talent."
Then why have we suffered such a deep recession and huge market losses? After all, the CEOs at the banks that got us into this mess were paid like kings. Let's take a look at some of the consequences -- and predictions -- brought to us by the supposed "top" talent purchased with all that money:
An extreme underappreciation of his problems. At Lehman Bros.' very last annual meeting in April 2008, then-CEO Richard Fuld opined that "the worst of the impact of the financial markets is behind us."
In June, he told investors the investment bank was "well-positioned" because of efforts to strengthen its balance sheet.
Fuld was supposed to be a "top talent"; Lehman had paid him more than $186.5 million in salary, bonuses and profits from stock options in the prior three years, according to Equilar, an executive compensation research firm.
Yet by autumn, Lehman vanished, setting off the October 2008 market crash. It had been killed by mortgage-backed securities and other investments made on Fuld's watch.
The cost of moving too fast. On Sept. 15, 2008,CEO Ken Lewis announced that the banking giant was buying Merrill Lynch, saying the deal -- cobbled together over a weekend -- was "a great opportunity" for shareholders because together the companies would be "more valuable" due to synergies.
Lewis had taken home $98.6 million from 2005 to 2007, so you'd think he would know what he was talking about.
He didn't. Thanks in part to the Merrill deal, B of A was forced to seek a $45 billion bailout from the federal government.
While that move forced a cut in Lewis' 2008 salary to a mere $1.5 million, he will walk away from his company with a golden parachute of $125 million when he retires at the end of the year unless the government steps in to reduce or halt the retirement package.
What seems clear is that these executives were blissfully ignorant of the growing risks to their businesses or simply chose to ignore them.
And despite all the bad press about CEOs raking in millions for lousy performance, the tricks continue. None of this is new. CEOs have been collecting big bucks for lousy performances for years. And now that companies are looking at year-over-year improvement as the market recovery extends, many of the same executives who rode their companies down in 2008 are in line to receive big performance bonuses for 2009.
Big Lie No. 5: Buy a flat-screen TV, save the economyWall Street wants you to spend, ostensibly to pump up the economy. Much of the federal stimulus package entails tax breaks and handouts to get people spending.
But it's really just another big lie to tell people they'll make a difference if they go out and shop.
The problem is that the economy is going nowhere -- no matter how much anyone spends -- until credit is flowing freely again and the job market sees significant improvement.
So play it safe. Hold on to your money. Most of you need to save more for retirement, anyway.
According to McKinsey Global Institute, two-thirds of baby boomers are unprepared for their golden years. Most of the boomers who are unprepared have a net worth of less than $100,000 even though they are just years away from retirement.
If you are younger, don't smirk. You need to save, too; otherwise you'll end up like them.
At the time of publication, Michael Brush owned shares of the Hussman Strategic Growth Fund (HSGFX).
Updated Oct. 22, 2009