Don't Follow the Latest Investment 'Fads'May 05, 2004 06:03PM ● By Shelly Cormack
By Ken Stelts
Sometimes it can be enjoyable to participate in the latest trends in music, food, and clothes. But if you regularly follow the latest investment “fads,” you might hurt your chances of achieving your long-term financial goals – and that’s no fun at all.
Investment fads are nothing new. From the railroad boom of the 19th century to day trading and Internet “dot-com” frenzies of recent years, we’ve always had fads. While the specifics of these fads vary, there’s been one constant: people lose their skepticism and get swept up in market hype and euphoria.
What causes stock market fads to take off? In general, three factors seem to be responsible:
The thrill of it all – Some people are risk takers – plain and simple. They want high returns from their investments and they’re more than willing to take big risks to achieve these results. They are drawn to new developments in business and new ways of packaging investments. While this group might not be in the majority, it may have enough power to get fads going.
Social acceptance – Once an investment fad has emerged, it attracts more and more people – even some whom might not typically be prone to take risks. Why? Because these investors perceive a fad and think that, if “everyone” else is following it, it must have some validity. In other words, the more people who buy a fad stock, the more acceptable it becomes for others to buy it.
Fast rising prices – Almost by definition, fad stocks are those whose prices rise rapidly over a relatively short period of time. And, of course, these rapidly rising prices will, in the short term, reward both the risk takers and the people who don’t want to miss out on a “good thing.” Sooner or later, fad stocks run their course, and their prices fall. And, if these stocks truly lacked the proper fundamentals for success, they may never again attain their previous highs.
How can you avoid being hurt by stock fads? Here are a few suggestions:
Look for quality – Instead of hopping after today’s hot property or tomorrow’s sure thing, you’re much better off investing in high-quality stocks that may bear fruit next year – and for years afterward. Look for those companies with strong management, solid business plans, good track records and competitive products. If you’re investing in stocks that have historically paid dividends, try to find those that have consistently increased these payouts over the years. Companies that regularly boost dividends are typically well run, with a strong concern for their investors.
Look for diversification – Instead of going after the latest fad stocks, try to find others that best fit your need for a diversified portfolio. Remember, your holdings should reflect your individual risk tolerance, your time horizon and your long-term objectives.
Look for progress – Most successful long-term investors follow a well planned, personalized strategy, often developed with the assistance of a qualified financial professional. If you’ve got this type of plan, you generally know what sort of moves you need to make – and when you need to make them. But if you periodically deviate from your financial “road map” by going after investment fads, you could lose your way. And it could be expensive and time-consuming to get back on course.
So, when you’re investing, forget about the fads. As an investor, you’ve got a lot to gain by being a little “old-fashioned.” b