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This week the spotlight is on
Punxsutawney Phil, the world's most
famous groundhog. As the folklore goes,
if Phil sees his shadow, he anticipates
six more weeks of bad weather and
retreats underground. If the day is
cloudy, he thinks it's spring and stays
above ground. Of course, many of us
would say that Phil is never right. If
you live on the East Coast or in the
Midwest or the Great Plains states, you
probably do not view the weather as
springlike in early February or six
weeks later, either. But Phil is not
alone in reliving his errors. Many
investors also keep making the same
mistakes, year after year.
How can you avoid being a
Groundhog Day investor? Here are a few
suggestions:
Don't chase after hot
stocks. You can find hot stocks
featured in financial magazines and
touted by so-called experts on
television. Even your next-door neighbor
may have a "can't miss" tip for you. But
you are probably better off by turning
the pages, flipping off the television,
and redirecting your neighbor to a
different subject. In the first place,
by the time you even hear about a hot
stock, much less buy one, it may already
be cooling off. And, more importantly,
it just may not be appropriate for your
needs. For example, if you already have
several stocks quite similar to the
"hot" one, you may find that adding it
to your portfolio may not boost your
diversification, which is essential to
investment success.
Don't "buy and sell" too
frequently. If you do not hold
stocks for at least a year before
selling them, your profits (if there are
any) will be based on your current
income tax rate, rather than the capital
gains rate, which is likely to be more
favorable. You are much better off
buying high-quality investments and
holding them for the long term, until
either your needs, or the investments
themselves, have changed.
Don't load up on company
stock. If you have confidence in
your employer, you might be tempted to
put a good percentage of your 401(k)
dollars in company stock, but this move
could be a big mistake. To look at an
extreme example, nearly 58 percent of
Enron employees' 401(k) assets were
invested in Enron stock as it fell 98.8
percent in value during 2001, according
to the National Association of
Securities Dealers (NASD). But even
after the fall of Enron, many employees
have maintained even larger percentages
of their 401(k) assets in their company
stock. Do not make that mistake.
Instead, diversify your 401(k) dollars
among your various investment choices in
a way that reflects your risk tolerance,
long-term goals and time horizon.
Don't stop investing when
the market goes down. The financial
markets will always go through ups and
downs. Some people bail out when the
going gets tough, preferring to wait
until things turn around. But the most
successful investors continue to invest
through good times and bad. If they
choose good investments, and hold them
for the long term, they are frequently
rewarded.
By following these tips, you
can avoid making those repetitive
investment mistakes that can prove so
costly. And even it is cloudy this
Groundhog Day, your financial future can
look sunny indeed
(Louis Mullinger can be
reached at the Edwards Jones office on
Wake Union Church Road in Wake Forest.) |
