Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Thursday, January 7, 2010

Red Flags for Investors

We’ve talked many times about the “typical investor” who buys high and sells low. Think back to the tech stock bubble in 2000. What was everyone doing? They were chasing the tech stocks off a cliff. They didn’t want to miss out. It didn’t matter that prices were already bloated. They told themselves: “Surely tech stocks will go higher! Won’t they?”

At the time, all we heard on television, in the newspapers and in magazines was what was happening with all the tech stocks. At cocktail parties, everyone bragged about their big gains. They were stroking their own egos. They bought at high prices with no thought about when to sell. Most people couldn’t even imagine an end to the upturn.

Of course the party ended suddenly and the huge gains evaporated overnight. Those who bet big by moving substantial portions of their portfolio into the hot assets experienced significant losses. As the market dropped and dropped, some sold out near the bottom, making things worse. They bought high and sold low.

What lessons can be learned? Clearly, there were warning signs, signs that tend to be there again and again: the TV hype, the bragging at cocktail parties, the relentless newspaper and magazine ads touting the huge returns of the newest “hot asset” to invest in. Relentless media and social focus on the latest hot asset should be red flag to every investor. We’re not saying that there couldn’t be some opportunity to take advantage of. In many cases, however, it is likely that the opportunity already passed you by.

Ask yourself this: “What investment is currently being promoted heavily on television and on a daily basis by several different investment companies? What have you heard at social gatherings or from family members as the asset to invest in now? Our answer: GOLD. Is it too late to invest in gold? It may well be. And then again, it may not. There is a lot of concern about the declining dollar, future inflation and high interest rates. Many worry about a continue decline in the U.S. economy. Nevertheless, we suspect that gold prices could easily become a bubble that once again catches investors looking for a silver bullet.

If you just can’t resist the gold temptation, keep your investment to no more than 5% of your total portfolio value and set high and low prices at which to sell. Then, stick to those prices no matter what. That will help protect you from a bubble.

The red flags are there. Don’t ignore them. They may well save you from some big losses down the road.


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