I am sure you have heard this axiom: If you don’t know where you are going, you will get there. Many folks investing today are on that path: they are investing without proper knowledge of the stock market, of investment basics, and lacking simple, concise, written goals. Later, these folks will experience great challenges.
Among other things, the Federal Reserve’s Quantitative Easing program, a euphemism for pumping money into the economy, is fueling rising stock markets. This could entice even more folks to invest in stocks because they might see opportunities to ‘make money.’ Beware; before investing, at least, ensure you dispel three popular investment myths, and understand the potential investment’s opportunity cost.
- Investing in the stock market is gambling
- Low priced stocks, especially those at 52-week lows are worth buying
- Investment analysts and advisors know how investments will perform
Investing In The Stock Market Is Gambling
Simplistically, investing is just another spending form. You buy a book, a car, a house, and you buy stocks, bonds, or other investment instruments. The key is to develop a solid process to follow instinctively before spending: a spending decision process.
Your attitude will decide how you behave, and so, you could choose to spend on stocks and bonds–invest–with a gambling motive. That’s why I advise folks never to invest unless they fulfill specific prerequisites, such as being debt free with an established process to replace major assets for cash, and having clear, concise, written investment goals.
Then again, even with clear goals, individuals need to know that consistent, solid earnings is the key sustainer of a business’ value, and ultimately, its stock market price.
Low Priced Stocks, Especially Those At 52-week Lows, Are Worth Buying
Here is a trap to avoid. A stock is trading at its 52-week low, falling over 50%, and you think it presents a buying opportunity. Maybe; on the other hand, maybe not! Likely, that business’ products and services no longer have the capability to produce previously perceived earnings. Alternatively, investment analysts and others may have promoted this business because of some fad or other irrelevant reason. Yahoo! and Nortel are examples of companies whose stock prices traded at unsustainable levels; after the expected collapse, their stock prices did not recover. Many other examples exist, particularly on the Japanese stock exchange.
As I mentioned above, as with all spending, we need to follow a spending decision process before investing. This will allow us to use a fall in stock price as a trigger to identify business’ fundamentals and potential investment opportunities.
Investment Analysts And Advisors Know How Investments Will Perform
When you listen to these folks, you might forget that they, like you and I, have no clue about the future. Some are in conflicts of interest, blinded, and pushing particular products. Others might be sincere but are relying on the past. And we know, the past might not be a good predictor of the future.
Can these folks help? Certainly, but each client must try to understand whom his or her advisor represents, and accept that advisors do not know the future. Accordingly, folks receiving investment advice must be fully aware that they, not their advisors, need to decide when and how to act from advice they get.
Before you start investing, dispel the above three myths, learn key investment basics, and learn and make sure you fulfill specific investing preconditions.
This final point is obvious but often folks overlook it. Investing in the stock market has an opportunity cost; it reduces by amounts invested, funds available for other purposes. Ten thousand dollars invested in the market could buy a car, pay a portion of a college semester’s fees, or be donated to charity. Therefore, as part of your spending decision process, ask these three questions before deciding to invest:
- What other alternatives exists to use funds you are about to invest?
- Given your present and expected situation, is this the best use of funds today?
- Will you need to replenish these funds to carry out other specific goals in the next three to five years?
© Copyright 2013, Michel A. Bell