Here’s a Tip: In Investing, Rely Most on Common Sense

It took $10,000 for George Dunnigan to see the danger in word-of-mouth stock tips.

That’s how much Dunnigan invested in a low-priced Texas oil stock 15 years ago that, a friend of a friend told him, was about to strike it rich.

“The story was along the lines that they were going to have an oil find or something big was going to happen that would make their stock double,” said Dunnigan, a 56-year-old retired New York accountant.

Instead, the company went out of business and Dunnigan lost his entire investment. He did learn an expensive lesson. “Now I never buy a stock on a tip,” he said.

Although Dunnigan learned the hard way--”That’s the worst investment mistake I ever made”--other investors needn’t follow in his footsteps, whatever the temptations.

Financial planners say the most common investment blunders--such as following hot tips from those in the know--are strictly for novices. Instead, use common sense, do some homework and you’ll not only sleep more soundly but show more profit for your efforts.

“The first mistake many people make is they don’t understand their own objectives,” said Ross Richardson, a certified financial planner at Linscomb & Williams, a Houston firm that gives financial advice.

It’s important to be clear about what you’re saving for and when you need the money. A 25-year-old teacher can afford to take more risks because she won’t need the money for retirement for several years.

So, financial advisors say, she might invest in a house or vacation home. If she has any spare money she should consider stocks. At 60, just years from retirement, she ought to put more money in bonds, which usually are less risky and pay a steady stream of interest income.

Investment blunders, of course, are easier to see after you’ve committed a few. So here are some more typical mistakes, and how to dodge them:

* Market timing. “The most common mistake is market timing,” said Susan Kaplan, a financial advisor from Wellesley, Mass. “Basically, people don’t want to feel the pain when the market goes down. And they want to take part in the pleasure when it goes up.”

However, even the best run into trouble when they start guessing where the market’s heading and then try to time their investments to take advantage.

For instance, Jeffrey Vinik, who ran Fidelity Investments’ flagship Magellan Fund, loaded up on government bonds at the end of 1995. Then bond prices plunged, Magellan’s performance disappointed investors and Vinik found himself a job elsewhere.

Almost one-third of Americans shifted investments from stocks as they dipped in July, many putting their money into cash, according to a survey conducted for the Mutual Life Insurance Co. of New York. Many missed out as stocks recovered the next month.

Instead of trying to time investments to make a killing or avoid a fall, financial planners say, look for funds and investments that match your goals. Focus on the long view. Try to make major changes only if your goals radically change.

* Emotional overload. “So many people let emotions guide their decisions,” said Richardson at Linscomb & Williams. “That seems to be the nature of our markets: fear and greed and everything else” in human nature.

Sometimes investors become so enamored of a company and its management or product that they’re reluctant to sell even as the firm’s prospects dim. Others lose faith in a stock and sell at the first sign of trouble.

Dunnigan, the retired accountant, knows the value of a cool head. In 1987, he bought stock in Citicorp, the New York parent of Citibank, because he was impressed with the way the bank did business with him. He held his Citicorp stock through the late 1980s and early ‘90s even as recession and a spate of real estate and other loan loses hurt its results.

“It does take courage not to panic with the rest of them and ride it through,” Dunnigan said.

By staying unrattled, Dunnigan saw his original investment in Citicorp more than triple as the bank battled back from adversity.

* Chasing past returns. “People want to put their money in whatever fund is hottest and has the highest six-month return,” financial advisor Kaplan said.

A stellar six-month performance doesn’t guarantee that the next six months will be as hot. As a result, it’s a good idea to choose funds and managers who’ve been around at least 10 years. When it comes to performance, you should look hard at a fund’s three-to-five-year returns, rather than a few months or a year. Another key is the degree of risk managers take to earn returns. These risks are typically spelled out in the sales documents of mutual funds or should be explained by brokers.

“If it’s a time when the market is riding relatively high, you don’t want to be with a manager who’s taking a lot of risk to achieve the same return as the market,” said Christopher Flanagan, senior vice president of Mellon Private Asset Management in Boston and New York.

* Playing the market. With stocks up so far this year, many individuals are tempted to forgo funds and play the market themselves. That’s fine, investment advisors say, as long as individuals do their homework.

“One reason the Beardstown Ladies are so successful is they do very serious research,” said Kaplan, referring to the investment club set up by a group of businesswomen in 1983, which boasts a 23.4% annual return.

Still, while playing the market may be more fun and exciting than socking away cash in mutual funds, it shouldn’t be where you put most of your money, financial planners say. That way, you won’t get hurt too badly if your well-researched plans go awry.

Most financial planners recommend putting the bulk of your investments in funds, which spread risk by investing in a basket of securities rather than just a few. Diversifying your investments--holding some growth stocks, blue chip stocks and foreign securities, for instance-- also helps spread the risk, they said.

* Read your statement. It’s worth taking the time to read and understand the monthly investment statements you get from your broker or investment manager. At the very least, you protect yourself against fraud and negligence, said John Lawrence Allen, in his book “Investor Beware!: How to Protect Your Money from Wall Street’s Dirty Tricks.”

Although most firms publish booklets that explain how to read investment statement, you shouldn’t feel shy about calling your broker and going through it line by line if necessary, he said.

“Think about how much time you devoted last month to your favorite TV programs,” he said. “Couldn’t you devote a little more time each month to something that has an enormous impact on your future?”