This week, the spotlight is on Punxsutawney Phil, the world’s most famous groundhog. As the folklore goes, if Phil sees his shadow, he anticipates six more weeks of bad weather, and he retreats underground. If the day is cloudy, he thinks it’s spring and he stays above ground. Of course, many of us would say that Phil is never right. If you live on the East Coast, or in the Midwest or the Great Plains states, you probably don’t view the weather as “springlike” in early February, or six weeks later, either. But Phil is not alone in reliving his errors. Many investors also keep making the same mistakes, year after year.
How can you avoid being a “Groundhog Day” investor? Here are a few suggestions:
•Don’t chase after “hot stocks.” You can find “hot stocks” featured in financial magazines and touted by “experts” on television. Even your next-door neighbor may have a “can’t miss” tip for you. But you’re probably better off by turning the pages, flipping off the television, and redirecting your neighbor to a different subject. In the first place, by the time you even hear about a hot stock – much less buy one – it may already be cooling off. And, more importantly, it just may not be appropriate for your needs. For example, if you already have several stocks quite similar to the “hot” one, you may find that adding it to your portfolio may not boost your diversification – which is essential to investment success.
•Don’t “buy and sell” too frequently. If you don’t hold stocks for at least a year before selling them, your profits (if there are any) will be based on your current income tax rate, rather than the capital gains rate, which is likely to be more favorable. You’re much better off buying high-quality investments and holding them for the long term, until either your needs, or the investments themselves, have changed.
•Don’t load up on company stock. If you have confidence in your employer, you might be tempted to put a good percentage of your 401(k) dollars in company stock – but this move could be a big mistake. To look at an extreme example, nearly 58 percent of Enron employees’ 401(k) assets were invested in Enron stock as it fell 98.8 percent in value during 2001, according to the National Association of Securities Dealers (NASD). But even after the fall of Enron, many employees have maintained even larger percentages of their 401(k) assets in their company stock. Don’t make that mistake. Instead, diversify your 401(k) dollars among your various investment choices in a way that reflects your risk tolerance, long-term goals and time horizon.
•Don’t stop investing when the market goes down. The financial markets will always go through “ups” and “downs.” Some people bail out when the going gets tough, preferring to wait until things turn around. But the most successful investors continue to invest through good times and bad – and, if they choose good investments, and hold them for the long term, they are frequently rewarded.
By following these tips, you can avoid making those repetitive investment mistakes that can prove so costly. And even it’s cloudy this Groundhog Day, your financial future can look sunny indeed
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