Global pandemics like The Plague and Ebola scare the crap out of me. Both are highly contagious and cause a painful death.
So what does The Black Death and Ebola have to do with investing? Bare with me.
Recently I was reviewing a prospective client’s statement. Something jumped out at me. It wasn’t a particular stock or bond, and it wasn’t even how much trading was going on.
The investor was over 70 and was 100% in stocks. Oh my!
I thought to myself, this is one investment strategy to avoid like The Plague. Voila! Another article for The Diligent Advisor. I often write about investment strategies to use, but I don’t write about investments strategies to avoid.
Here are 5 Investments Strategies to Avoid Like The Plague:
1. Avoid Micro Cap and Penny Stocks. Penny stocks are non-listed securities and do not trade on any exchange. They involve a very high amount of risk. Risk to me that is just not worth it. In addition, micro cap stocks are very small, but listed, stocks. Usually they have just started or have just begun trading and are thinly capitalized. Again, more risk. Avoid these investments like plague. Your portfolio’s health will thank you.
2. Avoid Large chunks of company stock in your 401(k). Enron should be all I have to say about this. Enron of course was a large legitimate company before it’s downfall. However, I see so many 401(k) investors putting large chunks of their retirement money in their company stock because of potential high returns. Remember, it’s not publicly traded and it’s probably a very small company. I’m not saying don’t invest here at all. I am saying keep it to a maximum of say 10%.
3. Avoid Being 100% Stocks in all markets. This is just a recipe for disaster as soon as a large market correction comes along. I have seen brokers that have put 70 year olds in portfolios with 100% stock. Even the most aggressive investors use other asset classes such as alternatives or hedges. I will say that I feel every investor should have some portion of their portfolio invested in stocks. Think of stocks as a portfolio antibiotic.It’s a great way to fight inflation and maintain purchasing power over time. I’m saying that percentage should decrease as you age.
4. Avoid Being 100% Bonds in all markets. There are two issues with this strategy as I write this. First, interest rates will be rising in the near future. I’ve already written about what will happen to your bond portfolio in rising interest rates. Their values will decrease. Second, it’s about inflation. You will struggle getting any real return after inflation and taxes are applied to a bond portfolio. Mark on your portfolio’s tombstone, “Here Lie My Investments, that Died from The Black Death – Inflation.”
5. Avoid Not being invested at all. When investors panic and sell their investments they generally go to cash. Cash is another asset class. However, the problem with cash is that the returns it generates are very low. Lower than stocks and bonds. So cash will not beat inflation at all. In fact, if you include taxes with inflation, you may be in a losing situation. Once an investor has gone to cash, they then have to know when to get back in. If you miss out on the upside, it will kill your returns.
Bottom Line. Keep a balance in all things, especially your investments. Diversification can help manage risk in a portfolio (Diversification and asset allocation strategies do not assure profit or protect against loss. It’s akin to simple hand washing to avoid getting sick.
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