3 Bad Investing Strategies That Persist
For a guy who was considered by some to be dumb, Forrest Gump was pretty smart -- at least if you gauge one of his mantras as sound investment advice.
"Stupid is as stupid does," he declared in his eponymous movie, and at least three times for emphasis. Yet how many investors who take pride in their above-it-all intelligence fall prey to low-IQ strategies?
"There are enough dumb strategies to fill at least one thick book with several sequels," says Steven Jon Kaplan, CEO at True Contrarian Investments in New York City.
[See: 10 of the Best Stocks to Buy for 2019.]
Here are three miscues that continue to bedevil investors, no matter how much common sense and sound mind may try to intervene:
-- Gambling on a winner.
-- Timing the market.
-- Sticking with cash.
Bad Strategy No. 1: Gambling on a Winner
Tim Speiss, partner and co-leader of accounting firm EisnerAmper's personal wealth advisors group, says it's all too common for gamblers to think of themselves as investors. He cites the story of one hapless chap "who treated the stock market as though it were a casino."
This man formed an investment club in the late 1990s but the only thing his compatriots won was a hard lesson from Lady Luck: "They chose stupid, stupid stocks; whatever was riding high at the moment," Speiss says.
Like? PalmPilot in 2000 at $9 a share, months before smarter tech drove the stock down to $8. And: The Sharper Image, based on a tip that the troubled company would soon put a turnaround strategy in play.
One member thought this sounded so promising, he invested his $3,500 Roth IRA contribution. "The company soon went bankrupt and the 2007 IRA contribution is now worth nothing," Speiss says.
"When your friends or buddies are just like gamblers they tell you about the wins but never the losses," says Cameron Burskey, managing director at Cornerstone Financial Services in Michigan.
Though so many know the drill, some wind up with a hole in the head.
[See: 10 Ways to Maximize Your Retirement Investments.]
"Investors are always listening to their neighbor or workplace buddy about what they should invest in or where they 'made a killing' -- and then follow them," Burskey says. "Even if it was a good investment, by the time they do get it the opportunity has usually already passed them by."
Bad Strategy No. 2: Timing the Market
Then there is the stubborn persistence of market timing, which involves banging your head against Wall Street's wall and hoping for a different result.
"The allure of market timing has cost investors possibly more in market underperformance than any other investment strategy," says Jeff Mascio, founder of Cannabis One, based in Denver, where he oversees the firm's investment portfolio of legal cannabis markets.
The market timing premise is simple: Get in on a stock before it rises and get out as it peaks. But that means you have to get things exactly right both times.
"Market timing is fully driven by the prevailing human emotions of greed and fear," Mascio says. "As a result, trading decisions driven by fundamental analysis or technical indicators typically get thrown out the window and overpowering human emotions begin to dictate trading decisions -- almost always driving down returns."
"Trying to time the market is like trying to predict the future," says Ali Hashemian, president of Kinetic Financial. "Investors would be better off making intelligent, unemotional reactions to the market instead of trying to predict what will happen next."
Bad Strategy No. 3: Sticking With Cash
"One of the dumbest investment mistakes is to not invest at all," says David Bakke, a personal finance contributor at Money Crashers. "Although there are caveats, it rarely makes sense to avoid investing at all costs."
Yet some people do exactly that, as evidenced by all those mattresses hiding gobs of cash. And to think, billionaire Warren Buffett famously said of such folk, "They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value."
[See: 5 Ways to Invest in Real Estate Without Much Money.]
And in some instances, all it takes to become part of an investment mistake is an invitation from a smooth sociopath. Consider Victor Lustig, who sold the Eiffel Tower for scrap metal -- twice.
Using forged French government documents and the bogus title of "Count Lusting," this fedora-crowned sharpie set up shop at a swank Paris hotel in 1925 and told a room full of industrial bigshots that the tower needed to come down "because of engineering faults, costly repairs, and political problems I cannot discuss." The moguls were spellbound. Bids poured in like champagne.
Ninety-plus years later, the Eiffel Tower is of course still standing: just like the vast majority of investors who stick to proven principles and stay away from towers of babble.
