Part 2: Two Strategies to Avoid

Stock picking. the process of trying to identify that one homerun stock, is highly risky. Although some retirement plans allow you to buy individual stocks, they may have a limit to the number of times and frequency with which you can trade in that manner. And the truth is that you’re as likely to pick a loser as you are to pick a winner. There would be few things worse than having to sit and watch your money sink along with a bad pick. Add to that the huge risk of owning only one stock (the all your eggs in one basket scenario) and stock picking becomes an obvious don’t for your tax-deferred portfolio.

Perhaps you can’t resist a hot tip you just received or a ground floor opportunity that’s come your way. Or you simply really believe in and want to support a particular company. That’s quite alright; as a matter of fact, it’s one of the things that make America what it is. Who can truly argue with any of the people who bought Microsoft in 1986? The point here is that you just don’t want to gamble with the strategic portfolio that you’ve built to achieve a certain financial goal, and you certainly should think long and hard before putting all of your eggs into that one stock.

Market timing is the attempt to enter the market when it begins to go up and get out when it starts to go down. So in essence, market-timers have to be right on two separate occasions. Successful market timing, it would therefore seem, requires not only a degree of clairvoyance, but an iron constitution as well.

Many experienced investors say that the very best time to buy is when prices have been falling for weeks or months and the market looks terrible. Conversely, the best time to sell is said to be when the market is and has been performing superbly. Not surprisingly, few individuals can actually bring themselves to do either of these. On the contrary, people generally tend to prefer to put their money into a market that’s been flourishing for a seductively long time, and they tend to want to sell investments after the market has been falling. More often than not, they end up buy the previous year’s top performer, convinced that it will continue its strong showing. However, it begins to lag and they’ll sell it or switch to the year’s second-best performer. These actions result in a buy high and sell low conundrum with losses, not to mention transaction fees, accumulating on both ends.

Momentum investing. which was rampant during the tech stock boom of the 1990’s, is another version of market timing. In this strategy, company fundamentals are secondary to analysis of the stock’s growth curve. Momentum proponents follow trends to buy stocks with a strong upward price momentum. The key, again, is entering the market at the right time. If you catch the momentum, your returns will grow. If you get in too late, they will invariably stall.

All that you truly need to do to be a successful investor is to become informed and to participate in the free market system of creating wealth. Learn and employ the six basic investing principles as outlined in Part 1 of this series, giving yourself plenty of time, and it’s likely that you’ll accumulate enough wealth to truly surprise yourself.

$7 Online Trading. Fast executions. Only at Scottrade