1. Rethinking ‘Buy and Hold’ Mutual Funds
Over the last ten years, the ‘buy and hold’ strategy for mutual funds hasn’t been very effective. Instead, strategies like using Exchange Traded Funds (ETFs), following the Modern Portfolio Theory, and doing semi-annual adjustments have shown great results. They’ve succeeded with the NASDAQ in 2000, real estate in 2005, clean energy in 2007, and the DOW in 2007, among others.
2. The Problem with Commission-Based Brokers
These brokers are mostly in it to sell and often don’t offer ETFs or suggest the Modern Portfolio Theory. In contrast, commission-free brokers are more focused on keeping their clients happy since they earn money by managing assets.
3. The Risks of Analyst Recommendations
Listening to analyst recommendations can be risky. University of California and Stanford studies show that the top stocks analysts picked in 2000 lost 31% in a year, while less popular stocks soared by 49%. This study looked at 40,000 stock suggestions from 213 brokerages. Not all analysts are dishonest, but they’re not financial prophets either. It’s more about market trends than dishonest analysts.
4. The Pitfall of Buying Bankrupt Stocks
Purchasing shares in bankrupt companies like Delta at $1.54, hoping they’ll recover, is a flawed strategy. Reconstruction often erases current common stock, leaving investors with nothing. Recovering losses legally is complex and costly.
5. The Trap of ‘Chasing Money’
Buying stocks after a spike in shareholder profits or a real estate boom is known as ‘chasing money.’ Many have been burned by this, like those who bought property at peak prices in 2005. If only losing weight were as easy as losing money!
6. The Trick of Hot Tips
Hot tips are often just ‘Pump and Dump’ or Ponzi schemes. Scammers use this trick, from Madoff to those pesky penny stock emails.
7. The Myth of Guaranteed Returns
Beware of anyone promising to double your money quickly or offering returns much higher than average. They’re probably either inexperienced or scammers, especially if they demand fast payment. Research their actual returns and background to avoid getting duped.
8. The Danger of Acting on Headlines
Headlines are meant to catch your eye. If you skip the details, you might miss vital information. Always dig deeper than just the headlines before investing.
9. The Spin of Press Releases
Press releases are crafted by company-hired pros to shine a positive light, often highlighting increased revenues while skipping over profitability. Always ask yourself, “What are they leaving out?”
10. The Risk of Single Sector Focus
Spread out your investments using ETFs and keep up with semi-annual rebalancing to make gains. With the Blue Chip Index now being the Bailout Index, it’s crucial to understand what’s in your ETFs.
11. The Dangers of Overinvesting in Your Employer
Following ERISA guidelines, aim to keep your own company’s stock to under 10% of your investments, unless you’re an owner who needs a majority stake to maintain control.
12. The Risk of Entrusting Family or Friends with Your Investments
Navigating investments with family or friends can be tricky and risky.