Five Dumb Things Investors Do With Their Money
Investors are human. We all make mistakes with our money, yet for some reason it’s the losses we remember most rather than the successes; the instances where we step out of our zone of comfort testing the waters of a new idea or trade concept. Above my desk at home sits a small wooden plack inscribed with the words ” Good judgement comes from experience, and experience comes from bad judgement”. It’s a subtle reminder that mistakes will be made in order to achieve success, but we need to learn from each mistake in order to become successful. In an effort to learn from the mistakes of others (the cheapest lesson of all) here are five all too common pitfalls of many investors:
Trade Volatility Lately, it has been en vogue to consider volatility its own asset class. Trading volatility has become possible through vehicles based off the Chicago Board Options Exchange Market Volatility Index, or VIX for short. A range of exchange-traded funds (ETFs) have been created so that investors can make bets on the extent to which the market bounces up and down.
Buy Bond Funds U.S. interest rates have been on a steady decline since around 1980 when they reached the double digits. These days, shorter-term rates are hovering around zero, while the 30-Year Treasury Bond rate is extremely low at roughly 3%. These low rates qualify as all-time lows in many instances, such as for bank Certificate of Deposits (CDs), mortgages and U.S. Treasury rates.
Speculate in Currencies As with trading volatility, speculating in short-term currency movements is another dubious investment strategy. As with most investing, a long-term perspective can be much more meaningful. The Economist magazine issues a Big Mac Index, the origin of which has been described as a “light-hearted way to make exchange-rate theory more digestible.” Namely, it looks at the price of a Big Mac across the world as a proxy for the extent that currencies are either undervalued or overvalued, relative to each other. Specifically, it states “that in the long run, the exchange rate between two countries should move towards the rate that equalizes the prices of an identical basket of goods and services in each country.”
Load Up on Gold A market strategist at Fifth Third Bank recently suggested that investors in gold implement a gambling strategy that also works in Las Vegas. After a big win or run up in any investment, put your initial capital back in your pocket and continue to play with house money. This minimizes the potential that an investment, such as gold, which has had an amazing price run, stops for a breather or gives up most of its original gains. Investors in residential real estate back in 2005 and 2006 would have been well served with this strategy, and while gold may continue to have a strong run (gold is up more than 150% over the past five years, while the stock market is flat), buying it aggressively at these levels is likely a very foolish trading strategy.
Invest in Social Media The fact that many social media firms continue to push through initial public offerings (IPOs) in the face of a difficult stock market should serve as a solid indicator that these companies have unknown underlying business appeal over the long haul. Firms including Groupon, LinkedIn, Facebook, Zynga and Twitter may be growing sales rapidly, but they are spending just as much to advertise and boost sales.
Collectively, they have unproven business models, barriers to entry are very low as competing sites are rather easy to develop, and hundreds of millions of dollars of investment capital are pursuing only a handful of good ideas in the space. It all spells a recipe for disaster, for investors looking to invest these days.
via Five Dumb Things Investors Do With Their Money – Forbes.