Stocks: Five Market Mistakes to Avoid - BusinessWeek
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Markets may have rebounded in 2009, but individual investors are still edgy and shell-shocked.
Even as the broad Standard & Poor's 500-stock index remained up 56% since March, the U.S. unemployment rate crept above 10%, according to a Labor Dept. report released Nov. 6. "I don't think many people are feeling very relieved," says Milo Benningfield of Benningfield Financial Advisors in San Francisco. Many people believe the "[stock market rally] can't last," he says.
These remain risky times, and the last few years have demonstrated to investors the high cost of doing the wrong thing. Against that nervous backdrop, BusinessWeek asked financial advisers what common mistakes investors are making, and how to avoid them:
1. Don't Jump In All at Once
A little optimism can be a dangerous thing. Individual investors are notorious for selling stocks when markets have already dropped and buying after they have risen. And, says Susan Elser of Elser Financial Planning in Indianapolis, "Selling low and buying high is the worst thing you can do for your returns."
Among those who stayed away from stocks and other risky investments for the past year, many are irked to have missed out on the recent rally. But is now the right time to buy again?
Don't rush back into the market because you worry you've missed the rally. "The biggest mistake is [to try] to make everything up at once," says Micah Porter, president of the Minerva Planning Group in Atlanta.
At these levels, a 10%, 15%, or 20% correction in the stock market is entirely possible at almost any time. So, instead of buying all at once, Porter advises buying stocks gradually over the next year—or, if you have a lot to invest, an even longer time frame. That puts you in the market long-term, but minimizes the chances you'll buy at the market's exact peak.
2. Don't Fall for Fads or Hype
In investing, jumping on the bandwagon is often a bad idea.
For example, television ads have appeared touting gold as an investment after the precious metal's price has jumped higher, approaching $1,100 per ounce on Nov. 6.
Yet this could be the very time when gold prices are at or near their peak. "This is probably the worst time in my opinion to pile into gold," Benningfield says. He also warns against currency speculation, another recent fad. "It's really risky," he says.
Along with other commodities, gold can be a valuable part of investment portfolios. But advisers like Steve Medland of TABR Capital Management in Orange, Calif., suggest keeping gold to less than 5% of your holdings.
Lots of marketing dollars are also pushing equity-indexed annuities these days. "It is the hot product of the day," Elser says. But Elser, Medland, and others warn about the complexity and high fees of these annuities.
3. Don't Use Headlines or Politics as Investing Guides
"Making [an investing] decision based on who is in political office, whether you agree or disagree, is a huge mistake," says Elaine Scoggins, client experience director at Merriman, a Seattle-based investment advisory firm.
Since the election of Barack Obama as President, political temperatures on the right have risen (just as tempers rose among liberals during the last Administration). And that could be leading to bad investing decisions.
Based on their political beliefs, people are buying into disaster scenarios, from high inflation to a crash for the U.S. dollar to skyrocketing tax rates, Scoggins says. "There are a lot of scare tactics in the media and in politics."
Betting your portfolio on these unlikely outcomes can be a big mistake.
"There's incredible fear out there," says Paul Sutherland, chief investment officer at FIM Group in Traverse City, Mich. But not all the fear is warranted. For example, he notes, a weaker dollar actually can help U.S. manufacturing or U.S. firms with overseas profits.
