Throwing Good Money after Bad


Observing all of the volatility in the financial markets lately, many people are beginning to question their investment approach. The realization that stock markets don’t always go up and can stay in the doldrums for extended periods of time has finally hit home. Some folks have lost a considerable amount of their “paper” wealth. For the first time since they were created over two decades ago, it’s been reported that even employee-sponsored traditional investment plans such as 401k’s have actually seen balances go down over the last year.

Over 40 million people rely upon 401k’s as a primary source for retirement income. Even outside of 401k plans, many people have lost lots of money. Investors are now concerned more with the return of their principal, rather than the return on their principal. And well they should be. At this point, one of the most frequently asked questions is “How can I avoid this happening to me again?” Nobody wants to throw good money after bad – experience can be too expensive a teacher. Chances are that it was bad advice that got folks into trouble in the first place. So when trying to avoid more pain, it’s appropriate to start by looking at some of the basic investing ideas that went unquestioned but turned out differently than expected.

You’ve probably heard the old saying that “what you don’t know can hurt you.” Consider the financial impact of those things you “know” that just aren’t so! Conflict of interest stories abound. Laura Unger, the current acting commissioner of the Securities and Exchange Commission, recently remarked that {quotes}“while the Nasdaq index was dropping 60 percent, less than 1 percent of main stream analysts recommendations were ‘sell’ or ‘strong sell’ recommendations.” {/quotes}Now, what does that tell you! Probably the best advice is that one should not blindly follow the herd and conventional wisdom. The “dot con” companies with P/E ratios of triple digits and no earnings were all the rage. Armies of highly-paid analysts were consistently recommending that we accept this so-called “new economy”. This is just one recent example of herd mentality and mainstream advice that went unquestioned by most investors.

It’s interesting to me that I seldom heard the words “mania” or “bubble” from the front line financial media during the irrational buildup. Yet after the collapse of this bubble, these same commentators and analysts are now using the phrases “tech bubble” and “tech wreck” when referring to the same exact period that they previously told us was a great “buying opportunity.” It pays to question even the most basic assumptions that are constantly emanating from the mainstream financial media. The key to preventing throwing more good money after bad is to take a fresh look at what they are telling you to do now. If you look at things the way everyone else does and just follow along, chances are that you’ll end up where everyone else is too. It’s time to break with the crowd. The remainder of this newsletter presents a different view of the investment concepts that have been touted as the orthodox methods that should be followed by typical investors. Orthodox or silly, you decide.

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