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1. The Fallacy of ‘Buy and Hold’ Mutual Funds
In the past decade, the ‘buy and hold’ strategy for mutual funds has proven to be a failing financial move. On the contrary, Exchange Traded Funds (ETFs), the Modern Portfolio Theory, and semi-annual rebalancing have demonstrated impressive results. They have successfully capitalized on the NASDAQ 2000, Real Estate 2005, Clean Energy 2007, DOW 2007 and others.
2. The Trap of Commission-Based Brokers
These brokers are primarily motivated to sell, often lacking the capacity to offer ETFs, with little incentive to propose Modern Portfolio Theory. On the other hand, commission-free brokers strive for client satisfaction as they profit through ‘assets under management’.
3. The Risk of Trading on Analyst Recommendations
Relying on analysts’ recommendations is a risky gambit. Studies from the University of California and Stanford highlight that top-rated stocks by analysts in 2000 shed 31 percent value in a year. Interestingly, the least favored stocks skyrocketed by 49 percent. This research evaluated 40,000 stock suggestions from 213 brokerages. While not all analysts are dishonest, they certainly aren’t financial oracles. This situation is more about market forces than dishonest analysts.
4. The Danger of Bankruptcy Buying
Buying shares in bankrupt firms like Delta at $1.54, expecting a bounce back, is a flawed move. Renovation strategies often wipe out existing common stock, leaving holders with nothing. Legal options to reclaim losses are convoluted and expensive.
5. The Illusion of Pet Rocks
Purchasing stocks after extreme shareholder profits or booming real estate markets is termed ‘chasing money’. Many have fallen victim to such schemes, like those who invested in real estate at peak prices in 2005. If only losing weight was as simple as losing money!
6. The Deception of Hot Tips
Hot tips may often be nothing but ‘Pump and Dump’ or Ponzi schemes. Scammers frequently exploit this mechanism, from Madoff to penny stock ads in your email.
7. The Fallacy of Sure Shots
Be wary of individuals promising double yields in a set timeframe or annual returns significantly higher than average. They’re likely inexperienced or fraudulent, especially if they insist on immediate payment. Proper investigation into their genuine returns and background can prevent scams.
8. The Peril of Buying on Headlines
Headlines are designed to grab attention. If you neglect the details, you could miss crucial information. It’s important to read beyond the headlines before investing.
9. The Spun Truth of Press Releases
Press releases are spun by professional writers hired by the company in question. Such a document can praise increased revenues without discussing profitability. Always question, “What are they not telling me?”.
10. The Risk of Single Sector Investment
Diversify your investments with ETFs and stay updated with semi-annual rebalancing to realize gains. Given how the Blue Chip Index has become the Bailout Index, it’s imperative to understand what your ETFs hold.
11. The Hazard of Over-Investment in Your Employer’s Company
As ERISA guidelines recommend, keep your own company’s stock under 10 percent – the exception being when you’re the owner and need a majority stake for controlling purposes.
12. The Jeopardy of Trusting Investments to Family or Friends
