Misconceptions and misinformation can wreak havoc with your portfolio, our columnist says.
Believe these bromides, and I'll sell you a bridge .
Misconceptions and misinformation can wreak havoc with your portfolio,our columnist says.
Some doctors do a great job of managing their money, either alone orwith a financial planner's help. They buy topnotch mutual funds and stocks,monitor their portfolios regularly, and don't let their emotions skew theirjudgment.
Unfortunately, not everyone is as savvy. Like many other investors, somephysicians buy impulsively, based on information from a friend of a friendor on a media report taken out of context. Similarly, some assume they fullyunderstand the market and their holdings. Planners, they claim, are fordummies and spendthrifts.
As the saying goes, a little knowledge is a dangerous thing. Let's lookat some misconceptions and faulty logic my clients have fallen for recently.
"I don't watch my portfolio. I just buy and hold quality stocks."Granted, it's smart to have blue chips in your portfolio, and not smartto watch them so closely that you overreact to normal ups and downs. Butjust because you own quality large-cap stocks or funds doesn't mean youcan put your portfolio on autopilot. Sooner or later, blue chips will slump--andpossibly at a particularly bad time for you. For instance, Compaq Computerslid 57 percent during a stretch early this year; over two months last summer,Coca-Cola dropped 40 percent.
And there's no guarantee a blue chip will stay one forever. Western Unionwas once a blue chip; then, in its prime, it passed on an offer to buy outAT&T. The price of Bethlehem Steel, another once-solid blue chip, hasremained stagnant for years.
If you're not willing to review your holdings at least quarterly, paysomeone to do so. Even then, you can't completely close your eyes. It'ssmart to give your money manager a checkup at least annually.
"Stock analysis is for nerds. I buy what's hot." For many people,a company's fundamentals don't count anymore. They'd rather trade stockslike baseball cards, buying only the most popular ones. While that strategycan work for a time, a company's earnings are what matter most in a long-terminvestment program. As I advised in this column last September, avoid runningwith the herd, and stick with stocks that are valued fairly and have a historyof steady earnings.
You or your adviser should particularly watch price-earnings ratios.Lately, investors have been willing to pay ridiculous prices for certaintechnology and Internet stocks--in some cases, regardless of whether thecompanies have earned a dime. A good example is on-line book, video, andmusic seller Amazon.com, which recently traded at about 106 despite a recordof zero earnings to date. And compare these price-earnings ratios (pricesdivided by earnings) with the Standard & Poor's 500 Stock Index's averageof 35: Lucent Technologies, 61; Vitesse Semiconductor, 67; and Macromedia,64.
Stick with reasonably priced or undervalued stocks and, in the long run,you'll do well. I prefer companies with single-digit price-earnings ratios,though they're hard to come by. Those with P-Es at least 30 percent belowthe S&P 500's are good buys, too. Well-known companies with favorableratios include Allstate (9), General Motors (9), Goodyear (22), and Sears(15) .
"TV and the Internet tell me all I need to know about investing."You can indeed get a lot of useful information and advice from these media,but you have to know how to interpret that input. One of my clients, whoworked for a business TV network, used to call me almost every day to reportthe latest financial news and to give me his market forecast. Not surprisingly,he also fretted over his portfolio and suggested any number of potentiallyhasty moves.
I understand that TV networks and magazines need to be provocative andnewsworthy. However, don't place a lot of faith in articles that tout "fivecan't-miss investments for the new millennium" or promise you'll "retirerich beyond your wildest dreams." And if what you read leaves you skepticalor confused, call a trusted financial adviser.
"I don't worry about risk. I have money in an index fund."With all of the publicity index funds get, it's hard to believe that somepeople don't understand how they work. But several of my clients clearlydon't, and they're probably not alone. For instance, one doctor thoughtthat because she owns an index fund, her overall portfolio has below-marketrisk. Another client believed these funds could outperform their indexes,while a third thought they have built-in protection similar to FDIC insurance.
In fact, such funds simply seek to track a particular market index. Theygenerally can't beat those targets. In fact, they can underperform the marketafter expenses are figured in. And they don't confer below-market risk ona portfolio.
If you know you'll be satisfied doing as well as the market but no better,index funds are for you. But plenty of actively managed funds have consistentlyoutperformed the overall market or their category benchmarks. I've writtenabout many of these funds in past columns.
"My friend says two great stocks made him a bundle." In myexperience, for every tip about a stock that goes on to outperform the market,there are at least 10 about stocks that don't.
Two winning picks don't prove that this friend will make money on everystock he purchases. Besides, chances are good that by the time your friendtells you about a hot stock, its big rise in price will be over. Indeed,your friend may even have sold it himself.
If you're not willing to roll up your sleeves and do the drudgework requiredfor a careful evaluation of a company, don't buy individual stocks. Certainly,never purchase a stock--or any other investment--based solely on a hunchor a tip.
Lewis Altfest. Believe these bromides, and I'll sell you a bridge.