Investing Don'ts
Seven Sure-Fire Ways to Lose Money in the Stock Market
- Invest while holding credit card balances – Unless your credit card has an interest rate below 5%, you will lose money until you pay it off. I know it’s a lot more fun to buy stocks and watch them surge ahead, but even the best money managers on the planet won’t consistently beat your credit card’s interest rate, so don’t even try. Bottom Line – Paying down high interest debt will do more for your short-term finances than any investment will.
- Don’t diversify – Putting all of your money into one asset class is gambling. The financial papers seem to have all the answers: US Large Caps are poised to take off; Gold is headed for $1500; Small Caps and Emerging Markets are out. They are always wrong. In 1999 it was hard to find anyone telling people not to invest in the tech sector. Bottom line: Stock picking and sector weighting is a gamble; diversifying is investing.
- Online stock tips – When somebody tells you that they have a hot stock tip, run away. All too often well-meaning investors get burned by buying stocks that someone suggested to them at a bar or in an online chat room. Bottom Line: Do what you tell your kids to do: don’t take candy from strangers and stay out of chat rooms, they are seedy places.
- Buy past winners – It is a proven fact that people pour money into their best performing mutual funds. It is also proven that every winner becomes a loser. Putting more money today into funds that did well yesterday is a sure-fire way to be broke tomorrow. Bottom Line: What comes up must come down. Balance your diversified portfolio every 18 months, taking money from your winners and putting them into losers.
- Buy stocks based on analyst opinions – An analysts’ job is to sell securities. It’s not always in her best interest to give her secrets away to the general public. Bottom Line: Do your own due diligence; 10-ks and 10-qs aren’t exactly Shakespeare, but ignoring them is putting you at a disadvantage.
- Stay with poor funds – just because a fund did poorly for the last 18 months does not mean that it is about to turn around. Compare your under-performing funds to similar offerings from other mutual fund companies. If your fund is in the bottom half of its category for three-, five- and ten-year returns it’s time to jump ship. Bottom Line: There are some dogs that are nobody’s best friend.
- Invest in stocks that are in the news – Google stock is mentioned in the mainstream news on a regular basis. That is a red-flag. Stocks should be in the background. When a stock is being mentioned in mainstream news because of its outstanding performance, it’s time to sell. Bottom Line: Buy the rumor; sell the news.
