"We found there was no statistical difference in stock market performance and the idea that the stock market did better during periods of gridlock is a myth," said Gerald Jensen, a certified financial planner and professor of finance at Northern Illinois University in DeKalb, Ill. "One reason people are so attracted to the idea that gridlock helps is because it fits in with their own personal belief that a 'do-nothing' government is better."
Yet Jensen's team did find validity in the presidential cycle truism that the third and fourth years of a term are better for the stock market than the first two years. Jensen was surprised to find how consistently correct that truism has been.
There's a reason why so many truisms are making the rounds in these troubled times, Jensen said.
"Psychologists argue that the human mind likes to make order out of chaos," he said. "People just like to have explanations -- and truisms make them feel better."
Many investors quickly exit the stock market after a big drop in their shares to avoid further damage. That's a bad idea.
"Historically, it is not a good time to sell when you think the world is coming to an end," said James Paulsen, chief investment officer with Wells Capital Management in Minneapolis. "Right now I believe history is in your favor because the downside is not that great and markets reflect a great many nightmares that may never come to pass."
There has been volatility this year, yet, despite all the "chronic scary news," the market hasn't really tanked, Paulsen said.
"Multiple bankruptcies of mainstay financial players, a doubling in the price of oil, chronic job losses and the biggest bailout ever were huge tests of downside risk," he said. "I don't think there is much downside left, though the real question is how long you must wait until it goes up in a meaningful, sustained fashion."
Some additional truisms that Lee disputes:
-- A rule of thumb among many financial planners is that the percentage of your asset allocation in stocks or stock mutual funds should equal 100 minus your age. Based on that, a 50-year-old would have 50 percent in stocks.
"That can really be far off because there are so many variables, such as longer life span or our current low interest rates that could go lower," Lee said. "It ignores goals, risk tolerance, current spending, time horizon before money is needed or how much of it is in retirement accounts."
-- You should project your retirement expenses to be about 70 percent of your working expenses.
"This has been a truism that many in our industry have used for the longest time, yet many people spend far more in retirement on traveling and doing things they've always wanted to do," Lee said. "If you plan to spend 70 percent and actually spend 150 percent, you could be on track to run out of money at age 74."
(C) 2008 TRIBUNE MEDIA SERVICES, INC.