What’s Your Investment IQ?
You don’t have to be Warren Buffett to do well in the turbulent stock markets. Following some basic guidelines for smart investing will get you through the ups and downs. But sometimes we forget those basics and then wonder why we aren’t seeing larger returns. Take this short quiz as a reminder about those tried and true investing principles.
T or F: You should sell when the market is down and buy when the market is up.
False. Many investors get nervous when the market is down and some tend to bail out rather than waiting for it to recover. Generally speaking, if this is your game plan for your portfolio, you are locking in your losses and usually at additional expense. Remember, If you originally positioned your portfolio with a balanced mix of stocks, bonds and cash that is right for your age and risk tolerance, the best step is to sit tight.
T or F: Following the advice of trusted friends or coworkers on investing is a good strategy.
False. When it comes to the stock market, what’s good for the goose is not always good for the gander. Someone’s idea of a good investment move may be entirely wrong for you, even if the advice comes from someone you trust. This holds true also for the recommendations given out all the time by financial “experts” on television and radio. Unless their advice matches your time horizon, risk tolerance and personal plan for your portfolio, it’s not good advice for you.
T or F: Ignoring what everyone else is doing and trusting your own judgment is a sound investing principle.
True. While you hear a lot about “following the herd” and how this strategy can be profitable, the majority of investors do not realize profits from copy-catting. A good case in point is the “dot-com” debacle, when investors lost considerable amounts after following the herd. You may never have consequences like that scenario, but think of how frequent buying and selling due to following the herd can lead to substantial transaction costs.
T or F: Timing is everything.
False. When it comes to investments, timing the market is rarely the best way to go. It’s extremely difficult to time trades correctly to ensure that you are entering your position right when the trend is starting. By the time you know about the newest trend, many other investors have already taken advantage of this news, and the “herd” strategy’s wealth-maximizing potential has likely already peaked. Therefore you are in effect entering into the game too late and will consequently lose money on this strategy.
T or F: Taking a cautious approach and waiting until the stock market “levels out” is a good strategy.
False. While being cautious in general and doing thorough research before investing are good ideas, waiting until the stock market levels out may mean you never get in. Ask yourself, when was the last time the markets leveled out? Investing in the stock market always involves risk, so take that into account when proceeding. If risk isn’t acceptable to you, decide to invest in safer financial instruments that offer less risk.
T or F: Getting rid of losing stocks is a good idea.
True, but a word of caution here: many investors hold on to their losing stocks way beyond the time when they should sell. Some hold a loser for years even though the stock has lost a large percentage of its value. If you do your homework and you get no indication that the holding will improve, in general it’s time to cut your losses and sell.
T or F: Smart investors check their stocks daily.
False. If you have a long-term strategy in place, checking your portfolio quarterly or annually is fine. An annual meeting with your financial advisor will help ensure you are still on track to achieve your goals.
Tune in to “America’s Wealth Management Show” sponsored locally
by Life Certain Wealth Strategies
Saturdays from 12 noon to 1 p.m. on news radio 630 KHOW.
Provided by courtesy of Herb White, MBA, CFP®, a CERTIFIED FINANCIAL PLANNER™ with Life Certain Wealth Strategies, 8400 E Prentice Ave, #715 Greenwood Village, Colorado, www.lifecertain.com, (303) 793-3999. Securities and investment advisory services offered through Woodbury Financial Services, Inc. Member FINRA, SIPC and Registered Investment Advisor. Life Certain Wealth Strategies and Woodbury Financial Services are not affiliated entities.