1. The Downfall of ‘Buy and Hold’ Mutual Funds
Over the last ten years, sticking to a ‘buy and hold’ strategy for mutual funds hasn’t worked out well. In contrast, using Exchange Traded Funds (ETFs), following Modern Portfolio Theory, and doing semi-annual rebalancing has shown great success. These approaches have yielded impressive results with markets like NASDAQ in 2000, Real Estate in 2005, and Clean Energy in 2007.
2. The Pitfall of Commission-Based Brokers
Commission-based brokers are mainly driven by sales and often lack the capacity to offer ETFs or suggest Modern Portfolio Theory. In comparison, commission-free brokers aim to satisfy their clients because they earn money through assets under management.
3. The Danger of Relying on Analyst Recommendations
Listening to analysts’ recommendations can be very risky. Research from the University of California and Stanford reveals that top-rated stocks by analysts in 2000 lost 31 percent of their value within a year, while the least favored stocks gained 49 percent. The research analyzed 40,000 stock suggestions from 213 brokerages. Analysts aren’t necessarily dishonest, but they aren’t miracle workers either; their recommendations often reflect market trends rather than insider knowledge.
4. The Risk of Investing in Bankrupt Companies
Buying shares of bankrupt companies like Delta at $1.54 with the hope that they’ll bounce back is misguided. When companies restructure during bankruptcy, common stockholders often end up with nothing. Trying to recover losses through legal channels is complicated and costly.
5. The Trap of Chasing Hot Markets
Investing in stocks or real estate after they’ve impressively soared is known as ‘chasing money.’ Many people have fallen into this trap, such as those who bought real estate at peak prices in 2005. Losing money seems far easier than losing weight!
6. The Scam of Hot Tips
Hot tips can often be ‘Pump and Dump’ or Ponzi schemes. Scammers love using this tactic, from the infamous Madoff to those annoying penny stock ads in your email inbox.
7. The Myth of Guaranteed Wins
Be cautious of anyone promising to double your returns within a set period or claiming they can achieve significantly higher-than-average annual returns. They might be inexperienced or con artists, especially if they’re demanding immediate payments. Always investigate their track record and verify their claims.
8. The Risk of Reacting to Headlines
Headlines are crafted to grab your attention but can be misleading if you don’t read the full story. Always dig deeper into the details before making an investment decision.
9. The Spin of Press Releases
Press releases are written by professionals hired by the company, often focusing on increased revenues without mentioning profitability. Always ask yourself, “What are they not telling me?”
10. The Danger of Single Sector Investment
To maximize gains, diversify your investments with ETFs and rebalance semi-annually. Given that the Blue Chip Index has essentially turned into the Bailout Index, it’s crucial to understand exactly what your ETFs hold.
11. The Risk of Over-Investing in Your Employer’s Stock
As per ERISA guidelines, limit your investments in your employer’s stock to under 10 percent, unless you own the company and require a majority stake for control purposes.
12. The Jeopardy of Trusting Family or Friends with Investments
Investing based on recommendations from family or friends can be risky. Make sure to do your own research and verify the advice before committing your money.