Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on how to spot good investments. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.
Today’s tip: “3 ways to miss out on good investments.”
Here are 3 classic errors that can seriously hinder your returns, and cause you to miss out on good investments. All investors make them from time to time.
Too little diversification among the 5 sectors: Manufacturing and Resource stocks involve extra risk, Canadian Finance and Utilities involve lower risk, and Consumer falls in the middle. Sectors go in and out of investor favour, depending on economic conditions, corporate earnings, and investor whim. But in the long run, winners and losers appear in all five.
If you stick to one or two sectors, you may get lucky and all of your picks will turn out to be good investments. Or, all your stocks may wind up out of favour and depressed. If you have to sell, you’ll do so at a low. So, spread your money out to eliminate luck. That way, you’ll always have exposure to the year’s most profitable investments, a key to successful investing.
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Selling good investments in anticipation of a market downturn: In times of market pessimism, many investors are tempted to sell all of their stocks, regardless of quality, in hopes of getting back in at lower prices.
However, selling to sidestep a market downturn rarely works out as neatly or as profitably as sellers hope. First, some stocks hold steady or rise during a downturn — these are often the strongest stocks in the subsequent upturn. And sometimes the downturn ends much more quickly than you expected, and you wind up buying back in months or even years later, at much higher prices.
Other times, the market moves up, the seller buys back in, and the real downturn begins. That can leave you down 20% or more on a 10% market downturn.
Failing to consider conflicts of interest: Financial incentives have an enormous impact on the beliefs of otherwise honest people: That’s particularly true when it comes to what they are willing to say in order to spur you to buy something.
Failing to spot these conflicts of interest can be very damaging to your investments. We’re not just talking about stock brokers. As the saying goes, never depend on your barber to tell you that it’s too soon for you to get your hair cut.
Next Wednesday, May 25, 2011, Investor Toolkit will give you our advice on the pros and cons of short selling stocks.
Good advice but how are we to know what the market is likely to do? You can get caught hanging on to good stocks as in 2008. Remember Oilexco? You were still advising to hold onto it as it was going down. Who ever expected it to go to nothing? The smart people sold it when it was high and advisors were telling investors to buy. Sometimes the best time to sell is when advisors are saying “buy”. It’s always better to make money even if it’s a small amount.
William Roy Isherwood
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Good advice but how are we to know what the market is likely to do? You can get caught hanging on to good stocks as in 2008. Remember Oilexco? You were still advising to hold onto it as it was going down. Who ever expected it to go to nothing? The smart people sold it when it was high and advisors were telling investors to buy. Sometimes the best time to sell is when advisors are saying “buy”. It’s always better to make money even if it’s a small amount.
William Roy Isherwood