Bad Investment Decisions

Bad Investment Advice

Have you received bad investment advice? Has your investment portfolio taken a hit?

Not all investments are good, and some good investments are bad for some investors. It can be devastating for the average investor when they are sold an investment, a Mutual Fund, or even Bonds, only to watch the value decrease after the purchase.

Remember this: When investing, “Timing” is everything.

During the past 25 years of trading and investing I have seen it happen countless times. As the stock market advances, the wrong investments continue to be sold to the unknowing investor. And then as the market declines, the same thing happens. Individuals being sold the wrong investments at the wrong time.

For instance, in 1999-2000 and again in 2007 as the market approached an all-time high, Financial Advisors continued to sell Mutual Funds and other investments that would certainly drop in value during ANY market correction, and would especially take a major hit if a bear market ensued.

Then during the bear markets, the interest rates drop to their lowest point in years and the salespeople start selling Bonds and fixed income investments because the public is too scared to buy Stock Funds. This is once again the ABSOLUTE wrong time to invest in Bonds.

This reoccurring scenario continually places the individual investor on the wrong side of the market. That's like buying a motorcycle for your son for his 4th birthday.

Good product - wrong investor - wrong time.

With a rising market and a good economy selling an investment in a mutual fund is an easy sale. Charts and graphs can be presented showing how well a particular investment might be doing. Problem is, everyone is a genius during the good times. But the sales become much more difficult during a declining market. And it never fails, during bad economic times the sales person will sell whatever they can regardless whether it is good or bad for the investor.

Are Bonds a good investment? Sure, they can be, but it depends upon what the particular individual investor needs. In other words, selling a 30 year bond to a 70 year-old widow simply because the bond pays 1% or 2% more than her CD, is probably not a good idea. She may need access to her money sometime before her 100th birthday. Or selling an individual investor a bond while interest rates are at 1% or 2% may not be a very good idea either. He or She may grow tired of making 4% a year. But believe it or not, this happens often.

When stock prices are down and the value of mutual funds have been decimated, investors are scared of further declines, and bonds become a salable item for financial advisors. The investor flees to safety and unknowingly is “Set-Up” for another huge disappointment. 

Why is this not a good time to buy bonds?

It can be a double whammy for the investor. You see, bond prices and interest rates move on an inverted scale. Meaning, as interest rates decline, bond prices increase. And as interest rates increase, bond prices fall. Therefore, when interest rates are at their lowest, the average investor will likely pay a premium for the bond.

Conversely, as interest rates begin to move higher, the bond prices will move down.

So in essence the average investor takes a hit two times:

1. They are invested in a fund that may, or may not ever return to the value of their purchase price. Their Fund investment value declines with the market, and that is their first hit.

2. They are sold bonds while interest rates are low and the market is down which sets them up for their next hit.

As the economy improves the interest rates will begin to rise once again. As this happens the bond prices will drop. The unknowing investor is then either stuck with a fixed income Bond paying only a few percentage points in income for 10, 20, or maybe 30 years, and the only way to get out of this investment is to take the loss. Another loss.

As I mentioned earlier, "Timing is Everything".

When interest rates are low and the market is down is NOT normally the time to buy bonds. Bonds should normally be purchased while interest rates are high and can then be sold for a profit when interest rates fall. Remember? As interest rates fall, the price (value) of your bond increases.

Similarly, mutual fund and stock investments should be purchased while the market is down and can then be sold for a profit during good economic times while the market is high.

There are many strategies that are simple and easy for the average investor to learn that will allow them to avoid classic mistakes of investing. These techniques and strategies also give the individual understanding of the market so informed decisions for investing can be made. Never depend on someone else for your financial future, especially not a salesperson.

Do yourself and your family a favor. Take the time to learn about Investing. Charting and Technical Analysis and Learning About Stocks are an excellent place to start. Your financial future depends on it. It’s not difficult and it’s not time consuming. It can save your investments.

Fred McAllen