Investment tips are a dime a dozen these days, with some more popular than others. The problem is, not all advice you get is good advice, even if they’re commonly passed around.
While investing in itself is an important element toward achieving financial freedom, implementing a negligent strategy that is built on hearsay can cost you years of under-performance.
Even worse, it can lead your portfolio to deviate from your individual needs and retirement goals!
Today, we look at five popular investment tips that might actually do more harm than good to your portfolio.
1. “Invest in penny-stocks! They’re cheap and they grow fast!”
Remember the Wolf of Wall Street? Leo DiCaprio makes his fortune by shoving garbage penny stocks down the throats of buyers by enticing them with the potential for massive growth.
The problem is that not only are penny stocks companies unlikely to ever become non-penny stocks, their, low market cap makes them prone to pump and dump and other fraudulent schemes.
2. “Buy stocks in companies that make what you love.”
Often people will tell you to start your portfolio by buying stocks in a company you love. The reasoning behind this is that since you love the product, and (likely) other people love the product, the company knows what they’re doing.
Unfortunately, just because they make a good product doesn’t necessarily mean they make a good investment. If you’re just entering the stock-market and you blindly buy stock in the companies you love, you’ll likely be over-paying.
Moreover, if you only buy companies you know, you’re basically starting the race by shooting yourself in the foot. You’re cutting yourself off from potentially high returns in other companies or other industries.
3. “Cut your losses and let your profits run”
This piece of advice is less terrible, and more “don’t follow this blindly.” When you cut your losses, you’re locking them in. Even if the stock bounces back, your loss will be forever cemented in your account.
Letting your profits run is generally a good thing, but sitting on a stock too long leaves you vulnerable to a collapse of the stock’s value before you can cash in. As always balance is key, and being too impatient or overly patient can both lead to worse returns.
4. “Use leverage to amplify the effects of your investment”
This is probably the most dangerous thing a beginner investor can do. Leveraging is taking on debt to pay for positions in the market. For example, if you only had S$5000 to invest, but you wanted to buy 100 shares of a stock priced at S$100 each, you could borrow the extra S$5000 you need. If the stock grows, your returns are bigger because you only put down half of the money, and all you pay is interest. If they don’t work out though…
This is actually not terrible advice, in fact, it’s pretty good advice. Putting all of your eggs in one basket can really hurt if that basket breaks. However, for the beginning investor, overzealous diversification makes it really difficult to keep up with your portfolio, which makes it difficult to learn how to follow the market and adjust accordingly.
Plus, diversification for its own sake has no value unless the investments themselves make sense. If a novice investor wants diversification with less of the complication, buying shares in an Exchange Traded Fund (ETF) is a good solution. ETFs are set up to track commodities, or a basket of assets, most often an index. Think of it as canned diversification. However, like canned anything, its never quite as good as the real thing. If you put all of your funds in ETFs, you’ll never get impressive returns, especially in this economy.
There you have it! Five pieces of popular advice that could cost you some precious time and money.