Everything You Know About Investing Is Wrong

Copyright © 2003 by John K. Sosnowy with Kori S. Voorhees.

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Contents

Acknowledgments

About the Author

Introduction

MYTH #1

If I make a high income, I’ll be rich.

MYTH #2

My home can make me rich.

MYTH #3

Collectibles are great investments.

MYTH #4

If I never take any stock market risk, I can’t lose.

MYTH #5

Simply buying and holding several good stocks or a good common stock mutual fund over the long haul is the best way to invest.

MYTH #6

Individual stocks are better investments than mutual funds.

MYTH #7

Dollar cost averaging takes the risk out of buy and hold investing.

MYTH #8

The stock market is a random walk. No one can predict what it is going to do.

MYTH #9

Asset allocation reduces risk and increases returns.

MYTH #10

Invest in what you know or where youwork.

MYTH #11

Time in the market, not market timing, is the key to investment success.

MYTH #12

Market timing is a relatively new investment strategy without proven results.

MYTH #13

The stock market can be counted on to make me 10-12 percent per year.

MYTH #14

I’ll never make any money in a down market.

MYTH #15

With the information available to me today, I don’t need professional advice. I can do it myself.

MYTH #16

After no more than one year, I should be able to evaluate whether my investment approach is working or not.

MYTH #17

Variable annuities are for fools.

MYTH #18

This time it’s different.

MYTH #19

There is a Holy Grail in investing . . . I just need to find it!

Epilogue

Summarizing the Alternatives

Glossary

Advance Praise for

Everything You Know About Investing Is Wrong

I have read hundreds of books on investing. This one ranks at the top of the list. No one has more insights into the value of active management than John. If you read only one book on investing, this is the one!

Roger Schreiner, Founder and President Schreiner Capital Management, Inc. and The Select Advisors Program

Congratulations on another book well done. I considered your first book a very important read for investors but I think this book should be required reading for investors of all experience levels before they make their next investment. You have successfully delivered the message of how every investor can attain long-term profitability with peace of mind.

Peter Mauthe, Chief Operating Officer Spectrum Financial, Inc.

I think you did an outstanding job on this (book). I wish I would have written it, but (I) probably (would) not (have written it) as well as you did.

Joseph Ludwig, President Tandem Financial Services, Inc.

It is a great and timely book . . . . Jonathan Swift said, Truths languish, while myths flourish.’ Nowhere does such flourishing take place more than in investing. Every objective investor would be well served indeed by reading this myth buster. John Lyons, President J. Lyons Fund Management

"Turning conventional wisdom on its ear, John Sosnowy’s follow-up to Lasting Wealth Is A Matter Of Timing proves, once again, that eating well and sleeping well are NOT mutually incompatible goals—a must read." Hays Glover, President Warwick Investment Management, Inc.

401(k) plans, IRA rollovers, retirement savings . . . never before has the responsibility for investing been thrust on so many individual investors, the vast majority of whom lack the investment education and the necessary time to properly monitor and manage their investments. Millions of novice investors have entered the Wall Street arena—an arena where minnows get eaten by sharks. John’s book exposes the Buy and Hold investment myths and gives the reader a clear, understandable path toward a vastly more prudent Active Risk Management investment approach.

Steve Blumenthal, President and CEO

Capital Management Group, Inc. and President,

SAAFTI

"In his new book, Everything You Know About Investing Is Wrong, author Sosnowy demonstrates that he is neither fooled nor intimidated by the shibboleths of the entrenched financial-planning establishment. I recommend this book for the investor who is prepared to critically examine some commonly-held (but wrong) beliefs and chart his own course."

Steve Shellans, Editor MoniResearch Newsletter

Your approach of focusing on key Myths that the consuming public has about investing brings concepts that are sometimes complex to an understandable level, thus making your recommendations more likely to be acted on by the consuming public. And given the likely position of their investment portfolio today, action does need to be taken—action such as the active risk management outlined in your book.

Steve Gradeless, National Sales Manager America’s MarketFlex Annuity Nationwide Financial Services

Finally, someone has exposed the conventional wisdom of Wall Street for what it really is—ill-con-ceived mythology, with little connection to the realities of today’s markets. John’s book is essential reading for real world investors!

Jerry Wagner, Chairman and CEO Flexible Plan Investments, Ltd.

To Colby and Kori:

Thanks for keeping me excited about the future

and motivated to share my

knowledge with your generation.

Acknowledgments

Compared to the effort expended and the lessons learned writing my first book, compiling the information for this book was fairly easy. I used many of the ideas and material from Lasting Wealth Is A Matter Of Timing, updated it to the present, and formatted it in a way that I believe is easier for the average investor to understand.

Therefore, most of my obligations and indebtedness are to those who first urged me to enter the investment management field and provided me opportunities along the way, those whose counsel sparked the ideas that formed the foundation of my investment philosophy, and those who encouraged me to persevere in the face of traditional skepticism. If you wonder if I was thinking of you when you read this, I was and sincerely thank you. Most of all, I am grateful to the loyal clients who possessed the discipline and patience to stick with me through the years. Without you, there would be no story to tell.

I also owe a debt of gratitude to Rick Maturi, coauthor on my first book, a true professional and a really nice guy. If it weren’t for Rick, I would have never completed my first book, much less have taken on this project to write a second book.

Investment professionals Steve Blumenthal, Linda Ferentchak, Hays Glover, Steve Gradeless, Joe Ludwig, John Lyons, Peter Mauthe, Louis Mayberg, Paul Merriman, Roger Schreiner, Steve Shellans, and

Jerry Wagner were kind enough to review portions of the manuscript, spot errors, and offer constructive comments and suggestions. The errors that remain are, of course, my own.

My wife, LaGayle, and my daughter and talented coauthor, Kori, both shared the excitement, labor, and tension of this project . . . and still had encouraging words to offer. To both of you . . . my heartfelt thanks and my love!

—John K. Sosnowy

About the Author

John K. Sosnowy

John K. Sosnowy is president of Sosnowy Investment Management Company (SIMCO), vice-president and portfolio manager of Flexible Plan Investments, Ltd., and chairman and CEO of SIMCO Financial, a member of the National Association of Security Dealers, Inc. During his decades of investment management experience, Sosnowy has been a nationally recognized pioneer in tactical asset allocation/risk management strategies. He is the founder and a past president of the Society of Asset Allocators and Fund Timers, Inc. (SAAFTI), an industry national trade association.

Sosnowy is a member of the American MENSA Society and holds a Bachelor of Science in Mathematics and a Master of Science in Industrial Engineering. His investment philosophy has been featured in Forbes, Financial Planning, Investment Advisor, Newsweek, Research, Technical Analysis of Stocks & Commodities, and many other national and regional publications. He has been a guest on Dan Rather’s CBS Evening News and hosted Money Talks, an investment radio show.

His first book, Lasting Wealth Is A Matter Of Timing, written in 1996, is considered by many to be the definitive work in this field.

He resides with his bride of thirty-four years, LaGayle, in Houston, Texas, and Seattle, Washington.

With Kori S. Voorhees

Kori S. Voorhees was marketing coordinator for Sosnowy Investment Management Company, Inc. (SIMCO) for three years before embarking on a fulltime writing career. Her first novel, Christmas on Wednesday, was published in 2002.

Voorhees received her Bachelor of Arts in Business Administration with a Marketing concentration from the University of Washington. She lives with her husband, Colby, in Seattle, Washington.

Introduction

The main goal in my first book, Lasting Wealth Is A Matter of Timing, written in 1996, was to spread the risk management gospel to many thousands of investors in time to protect them and to save their wealth from the effects of the next devastating bear market which I saw looming over the horizon. As I stated then, The days of the current roaring bull market are numbered. You can quote me on that. Sooner or later , the big bullish wave in stock prices will end and come crashing down . . . . Unless investor attitudes change dramatically, I predict that hanging on blindly, or buying the dip, in the hope of a price rebound will be the downfall of many baby boomers and disastrous to their retirement years. That is what I hope to prevent by writing this book.

The good news is that since 1996 thousands and thousands of investors did get the message in time to protect themselves from the worst of the stock market debacle that has occurred since 2000. Depending on which active risk management strategy or strategies they utilized, some fared better than others. But I believe it is safe to say that almost anyone who followed the suggestions in my book is better off today than if he or she followed the old traditional buy and hold strategy during the same period of time.

Unfortunately, you may be one of the hundreds of thousands of investors, maybe even millions, whodid not get the message in time. This book, Everything You Know About Investing Is Wrong, is written for you. The purpose of this book is not to tout me as the world’s greatest money manager, nor is it to convince you to hire any firm I am affiliated with to manage your money. When I give you a phone number or a website address, it is simply to assist you in gathering more information and/or prospectuses. It is not a recommendation of any firm or strategy. My goals for this book are to dispel some of the most common myths about investing, to share with you what I have learned in over thirty years of investment management experience, and to give you hope for your future investment success. Of course, probably not everything you know about investing is wrong; however, a majority of what you think you know may be wrong . . . which makes this book worthwhile for you.

The first three myths set the stage for the rest of the book. In Myth #1, I will explain the important differences between accumulating wealth and retaining wealth and give you some suggestions for planning for a worry-free retirement. In Myths