by John Persinos, InvestingDaily.com
Investing Daily Article of the Week
I get some of my best topics from readers. This email arrived yesterday in my inbox and it’s worth sharing:
“When you think about the past U.S. presidential election, voters were subjected to a lot of ridiculous assertions. I’m wondering, what are some of the dumbest investment statements you’ve ever heard?” – Charles K.
Think about the past election? I’d rather remove my own spleen with an oyster knife. But it’s true, during my three decades as a financial analyst, I’ve encountered a lot of stupid investment assertions.
Albert Einstein once said:
“Only two things are infinite, the universe and human stupidity, and I’m not sure about the former.“
As part of my civic duty to make you a better investor, here are five of the dumbest investing statements I’ve ever heard, followed by a quick remedial lesson from me. These phrases are all-too-common and deadly for your portfolio.
See if you can read my list, without wincing or slapping your hand on your forehead:
1) “I wouldn’t buy stocks right now because the market is performing badly.”
This has been a particularly volatile year, rife with uncertainty. But don’t watch market fluctuations too closely. If you put your money into inherently strong companies, they’ll be fine 10, 20 or 30 years from now. Bull and bear markets come and go, but equities as a whole rise over the long haul.
2) “My portfolio is diversified because I bought a mutual fund that tracks a broad market index.”
Diversification is important and a mutual fund pegged to, say, the S&P 500 is a good start. But it’s not nearly enough. You should also diversify among various categories of stocks, bonds, interest-earning investments, real estate, international equities, etc.
3) “I just bought a stock and it’s tanking, so I’m gonna cut my losses and dump it.”
Checking the performance of your portfolio or a single stock on a frequent basis is a recipe for losing money. Keep sight of your strategic investment goals.
Once you’ve bought a stock with solid fundamentals, remain patient and don’t get rattled by temporary setbacks and the inevitable ups and downs.
Jim Pearce, chief investment strategist for our flagship publication Personal Finance, offers this level-headed guidance:
“We believe in owning companies with strong fundamentals and undervalued share prices, such as those that score highly according to my IDEAL stock-rating system.”
This “IDEAL” (Investing Daily Equity Analysis List) system ranks all 500 equities in the S&P 500 according to three variables that are highly correlated to share price. These variables are dividend yield, growth in cash flow, and relative value. The total score is on a scale from 0 to 10.
Jim explains:
“If you want to outperform the average, or index, over time then you need to own a portfolio of stocks that are above average. The IDEAL stock-picking system is designed to help you do precisely that.”
I’ll provide more details about the IDEAL system in future issues.
4) “My broker is a genius and will make me a fortune.”
If there’s any recurring theme in this publication, it’s the need for you to think for yourself. Many brokers are reputable, honest and hardworking. But not everything a broker does is solely to your benefit. There can be some self-interest built into a broker’s advice.
Falling for bad advice can wreck your returns. You must arm yourself with investment information that’s objective and based on the facts, not advice from someone who makes a living from commissions. Do your own homework.
5) “The investing rules are different this time around.”
Number five is particularly harmful. Certain immutable laws govern the economy and financial markets; they don’t change over time.
Solid companies are in an industry you understand, selling products and services that people love, have long-term value and are fairly valued. An investor who says these time-tested rules no longer matter is a sheep about to get fleeced.
As Forrest Gump might say, in surveying this sampling of investing misconceptions:
“Stupid is, as stupid does.”
Have you overheard (or in a weak moment uttered) a really dumb remark about investing that you’d like to share? Drop me a line at: [email protected]
Smart versus dumb money…
The fast-moving technology sector seems to attract the smartest…and the dumbest…money. I’m reminded of this staggeringly obtuse statement, uttered by someone who should have known better:
“There is no reason anyone would want a computer in their home.”
Those words were spoken in 1977 by Ken Olson, the founder of Digital Equipment Corp. (DEC), about the burgeoning personal computer industry and its stocks.
As upstarts such as Apple (NASDAQ: AAPL) soared, revolutionized society, and made billions of dollars, Olson never was able to re-position his once-mighty company, which made “minicomputers” for businesses. Over the years the floundering company’s assets were sold to various other companies, such as Compaq. DEC merged in 2002 with Hewlett Packard (NYSE: HPE), which ceased to use the DEC name and later encountered its own woes.
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