Investors deal with many “evil” tricks that can hinder their investment portfolio. Smart investors know that many of these “tricks” can be used to their advantage. The five investment tricks you must avoid include the following:
1. The Stock Market Is Overvalued
Many so-called investors suggest that the stock market is overvalued. Also, many investors will state that a stock is grossly undervalued, and is sure to be a winner in the coming months. The main issue is that measuring price-to-earnings ratios (P/E) only provides part of a company’s story.
It is up to you to do your to diligence and analyze the real facts through the company’s annual report.
A company’s true value cannot be determined through one calculation.
2. Sell Seasonally to Profit
When you’re told to sell seasonally and buy stocks closer to the holiday season, this is an unwise choice and more of a trick than solid investing advice. Winter months are not immune to fluctuations. While the months of November through January perform statistically better, timing the market is impossible.
A long-term strategy provides better returns while cutting down on your fees.
3. Buybacks Drive Stock Prices Higher
General Electric (GE) made an announced recently that the company purchased $50 billion of its own stock in a buyback plan. Many investors believe that a buyback will push the stock’s price higher, but this is a fallacy.
AT&T (T) is a prime example of a company that has aggressively purchased their own stock while struggling to maintain its stock prices.
When a company buys its own stock, it cannot spend this money on expansion, research or other pertinent business activities. Just because a company is buying its own stock back, it doesn’t mean that the stock price will rise as a result.
4. Your Manager Will Earn Their Fees
Many investors are far too invested in their money managers. Active funds and active money managers typically underperform against passive funds. As a whole, the stock market rises, on average, 7% per year.
Even stock mastermind Warren Buffett recommends investing in low cost index funds.
The main issue is that a manager needs to perform on par with the market, so the manager will take greater risks with your money. Added fees will also eat into your portfolio’s profitability.
5. Investing in an IPO and Watching Profits Soar
IPOs can surge, but many struggle to maintain profitability. Twitter (TWTR) skyrocketed by 73% on the first day, but this is an exceptional case. Many IPOs are overvalued, causing the price to drop quickly.
Investors that purchased Twitter stock initially, could have made a sound return if they sold their stock quickly.
Twitter might have been a good choice for investors, with the company’s stock selling at $41.65 a share when it first opened. The stock price skyrocketed to $69 a share on January 3, 2014. As of November 3, 2015 the stock is priced at $29.19 a share. Unless investors sold their stock when the price was high, they would have lost over $10 a share.