Twelve Common Investment Pitfalls to Avoid
### The Pitfall of ‘Buy and Hold’ Mutual Funds
Over the last ten years, sticking to a ‘buy and hold’ strategy for mutual funds hasn’t been very effective. Instead, Exchange Traded Funds (ETFs), the Modern Portfolio Theory, and a strategy of rebalancing twice a year have shown better results. These approaches have taken advantage of opportunities in markets like the NASDAQ in 2000, and in real estate, clean energy, and the DOW in the following years.
### The Trap of Commission-Driven Brokers
Commission-based brokers are often more focused on selling than on providing diverse options like ETFs or the Modern Portfolio Theory. Meanwhile, brokers who don’t charge commission aim for client happiness because their earnings come from managing assets.
### The Risk of Following Analyst Tips
Basing your trades on what analysts recommend can be risky. Research from the University of California and Stanford found that stocks rated highly by analysts in 2000 dropped 31% in value within a year, while less popular stocks soared by 49%. The studies examined 40,000 stock recommendations from 213 brokerages. While not all analysts have bad intentions, they also aren’t reliable predictors of financial markets.
### The Danger of Investing in Bankrupt Companies
Buying shares in bankrupt companies with the hope of a recovery, like purchasing Delta shares at $1.54, is often a mistake. Restructuring plans usually eliminate current common stock, meaning investors could lose everything. The legal processes to recover such losses are complicated and costly.
### The Illusion of the Next Big Thing
Trying to buy into stocks or markets after they’ve experienced huge profits often leads to losses. This is especially true for those who bought into real estate when prices were incredibly high in 2005. If only losing weight was as effortless as losing money!
### The Deception of Hot Stock Tips
Hot stock tips can often be a cover for ‘Pump and Dump’ or Ponzi schemes. From well-known scammers like Madoff to suspicious penny stock emails, it’s important to be cautious.
### The Myth of Guaranteed Returns
Beware of anyone who promises to double your money in a short period or offers returns that are notably higher than the norm. These claims often come from inexperienced or dishonest individuals, especially if there’s a rush to pay. Doing your homework on their real track record and history can prevent potential scams.
### The Risk of Investing Based on Headlines
News headlines are meant to grab your attention. If you ignore the finer details, you might overlook key information. It’s essential to dig deeper than the headlines before making investment decisions.
### The Half-Truth of Press Releases
Press releases are crafted by professional writers hired by a company. They can talk up increased revenues without mentioning if the company is actually profitable. Always ask yourself, “What are they leaving out?”
### The Danger of Putting All Your Money in One Sector
It’s wise to diversify your investments using ETFs and keep up with semi-annual rebalancing to see profits. Understanding what’s in your ETFs is crucial since the Blue Chip Index has turned into the Bailout Index.
### The Risk of Over-Investing in Your Employer’s Stock
As per ERISA guidelines, it’s advisable to hold less than 10% of your company’s stock unless you’re the owner and need a majority stake to maintain control.
### The Danger of Relying on Family or Friends for Investment Decisions
Placing your trust and investments in the hands of family or friends can often lead to trouble. It’s important to remain cautious and make informed decisions independently.
