To Lose Money in 1998, Just Follow These Simple Guidelines


Everyone with a little financial know-how would like to tell you how to make money in 1998. But this column is about how to lose money in 1998.

Who wants to lose money? No one, of course--and that’s the point. If you follow any of these, uh, tips, you may greatly increase your likelihood of experiencing the losses you dread so much.

Here goes:

* Rearrange your entire investment portfolio based on one analyst’s short-term market forecast. People on Wall Street are paid to have opinions. Currently, more than a few of those professionals say the U.S. stock market is headed for big trouble this year.


Let’s say you believe that--to the point of selling all your stocks. Will that expert you followed then tell you when to get back into the market? Will that expert make up for any gains you forgo should the market rise rather than fall while you’re sidelined?

If you’re mulling an all-or-nothing market-timing decision based on somebody else’s forecast, remember that in 1997 almost no one on Wall Street predicted that Asia would blow up, that gold prices would drop to 12-year lows or that the Dow Jones industrial average would rise more than 20% for a third year in a row.

Still not dissuaded? See if these names ring a bell: Joseph Granville, Robert Prechter, Elaine Garzarelli. All once were well-known market gurus--but the market ultimately defied and humbled them all.

* Avoid basic diversification principles. Perhaps the surest path to ruinous investment losses is to keep your assets concentrated in a relative few securities or types of securities.

Has your employer’s stock been a stellar performer over the last few years? Great. But if that stock now accounts for half your financial assets (in your retirement plan, for example), how would you feel if the price were to collapse, for whatever reason?

Proper diversification doesn’t mean owning more assets than you can reasonably monitor. But it does mean using common sense to structure a portfolio of stocks and other financial assets (at a minimum, a cash cushion, and perhaps bonds) that makes sense for your risk tolerance. (See story on portfolio rebalancing on D10.)


* Fall in love with your stocks. Loss of objectivity often leads to loss of money.

It’s healthy to respect well-run companies and want them to succeed, especially when you own their stocks. But the closer you are to an investment, the less likely you are to see the big picture--and if that is changing to the disadvantage of your company, you may not realize it until it’s far too late.

A wise investment manager once said, “There are no ‘growth stocks’--just companies in growth phases.” In other words, fast-growing, popular growth companies don’t necessarily stay that way forever. You have to be able to recognize when a company’s prospects no longer justify the affection you may feel for the stock.

* Buy lousy companies just because their stocks look cheap. Master investor Peter Lynch once put together a list of the “10 most dangerous things people say about stock prices.” One of them was “The stock price is $3. What can I lose?”

The answer, Lynch noted, is that you can lose 100% of your investment if the company ends up in bankruptcy. His point was that low-priced stocks often get that way for a reason--because the company that issued the stock is poorly run and/or has bad business prospects.

There’s a corollary to that: High-quality companies never go out of style on Wall Street, although their stocks may temporarily go out of style if they become overpriced.

* Dwell on your investment mistakes. Feel free to spend days, weeks, months lamenting your investment losers. That will assure that you have no time to spend productively seeking out new ideas.


Obviously, you should learn from your mistakes. And the first thing to learn is that everybody makes mistakes. Even Warren Buffett has had a few.

When you err in investing, try to figure out what went wrong--and then move on. Remember: A stock doesn’t know you own it. Don’t take it personally.

* Pay no attention to investment commissions and fees. Maybe you’ve heard that line about the broker proudly showing off his new yacht to a friend. “And where are your customers’ yachts?” the friend asks.

Simply put, as an investor you should get what you pay for. If you’re paying high commissions for financial advice or investment transactions facilitated by an advisor, you should be earning decent returns on the portfolio that advisor has constructed.

If you’re not--and you’ve got at least a couple of years’ experience to judge--it’s probably time to find a new advisor.


As for your mutual funds, have you ever looked at the management fees you pay? The Morningstar charts in today’s section include expense ratios for many of the most popular mutual funds.


Again, you should get what you pay for: If your fund’s expense ratio is well above average, you should be getting well-above-average returns.

Think of it this way: Every percentage point in expenses that your fund manager takes is a percentage point off your return--a loss to you, by any other name. That may not be a big deal when stocks are rising 20% a year. But if far skimpier returns set in for an extended period, those fund expenses are going to cost you dearly.

* Never think about the tax consequences of your investment decisions. Uncle Sam just loves it when you decide, for no good reason, to sell an investment at a gain. He takes his cut every time--either at “ordinary” (as if!) income tax rates if you’re taking a short-term gain, or at the lower long-term capital gains tax rates.

Oh sure, Uncle reduced those long-term gains tax rates in 1997. Hold an investment for 18 months now, and any gain you realize when you sell will be taxed at a maximum of 20%, down from 28% before the tax law was changed last summer.

But 20% is 20%. If your capital gain is $1,000, that means Uncle gets $200. Many states then take their own little piece of your action.

Don’t read this wrong: When it’s time to sell an investment, it’s time to sell. But you should have a fundamental reason for selling. If you aren’t sure whether to sell, maybe Uncle’s outstretched hand will help convince you to err on the side of holding on and allowing the magic of compounding investment returns to work for you.


* Take investment tips from cold-calling brokers. It’s amazing that this still goes on, but it does: Broker Smith gets your phone number from God knows where and rings you up. “How would you like a stock tip?” he asks.

That’s when you should give Broker Smith a tip: Get permanently lost!

Anyone who tries to sell you anything over the phone, with no knowledge of your financial situation or your risk tolerance, is nothing but a discredit to the professional investment business.

If a broker or other financial advisor wants to meet you in person and talk about your overall investment picture, fine. But if you ever buy a security from someone you don’t know and who doesn’t know you, you deserve the losses you’re likely to suffer.

* Don’t trust your instincts. Individual investors often fail to realize the great advantage they have over big institutional investors. For the most part, the latter have to move with the herd, because that’s the way you keep your job on Wall Street. (“It’s warm inside the herd,” the saying goes.)

As an individual investor, you answer only to yourself--and maybe your spouse. That gives you the full freedom to trust your instincts. And more often than not, you may find that your instincts will serve you very well, especially the more you learn about investing.


If you think you have too much money in stocks, for example, then you probably do--because if you’re concerned, then that worry will overshadow every investment decision you make. Likewise, if you think you have too little in stocks, you probably recognize on some gut level that irrational fear of the market is obstructing your logical understanding about the long-term payoff from stocks.


Learn to trust yourself. You know yourself better than anyone else ever will.

Tom Petruno can be reached at