If the news says a stock is hot it’s probably too late to invest

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One of the steps I’m taking to mitigate my debt is investing. Currently, I have several mutual funds with American Funds.

However, this summer, I decided to graduate from investing into mutual funds to individual stocks. I did some research. I read the financial magazines and watched CNBC. They all seemed to be in agreement that gold was the thing to invest in.

So, being the investment novice that I was and still am, I opened up an E-trade account, and invested $500 in gold.

Well, as soon as I bought my shares, gold started plunging in value. I didn’t sell, though. I thought if I toughed it out, then maybe it would rebound soon. It never did. I sold after three months and took a hit of $100.

Lesson: It’s good to research when investing. But if commentators say a stock is hot, it’s probably too late to invest in it. Just stick to fundamentals when investing.

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5 Comments

1. JMG on 06.11.2006 at 12:32 (Reply)

   Good lesson to learn. Even more important, learn the difference between saving and investing. You cannot “invest” to “mitigate debt.” To deal with debt, you reduce outgo and do what you can to increase earnings.

   Only after you have an emergency reserve, sufficient insurance, and enough saved to, if you choose, pay off the debt, can you invest the excess in speculative ways.

   Read Burton Malkeil’s “A Random Walk Down Wall St.” for both an excellent introduction to markets and also good guidance for beginning investors

2. The Frugal Law Student on 06.11.2006 at 15:37 (Reply)

   Thanks for the tip on the book. I’ve heard alot about it, I just have never got around to reading it.

   I guess I consider my investing in mutual funds a form for savings. It’s not really speculative, say like gold. I have it set up on an automatic deposit system. I don’t really think about if the stocks are going up or down, because I’m in these funds for the long haul.

3. JMG on 06.11.2006 at 18:46 (Reply)

   Pardon me, but as someone who was a VERY frugal law student, let me just call B—S___ on that.

   The mutual fund salespeople want you to think you are not investing, but the bottom line is that you are PAYING good money in management charges (I assume you are smart enough to avoid loaded funds) for the privilege of having someone else do for you what you should not be done, which is make trades in a futile attempt to “beat the market.”

   You should only be risking your money in the market if you

   (A) have the emergency reserves (6 mos. living expenses in cash)

   (B) have sufficient insurance–look into disability insurance for Mrs. FLS now! While you are young!

   and (C) actually aren’t in debt at all and are really just fooling around because you know you could pay off your loans.

   Otherwise, you should be using any money you have lying around to reduce the amount you borrow.

   You may not have been in the market in 1987 or 2001 but plenty of people learned that so-called “low risk” mutual funds really just do whatever the market does. And the market is poised to deflate like a balloon–but don’t take my word for it, the point is that you can’t afford to be wrong no matter what the market is doing, and that means you shouldn’t be in it, period.

   Mutual funds are NOT, repeat NOT a form a savings. Mutual funds are where you PAY a fee so that someone else can play with your money and, 80% of the time, not do as well as if a monkey picked the stocks. (See RWDWS for references.)

4. The Frugal Law Student on 06.11.2006 at 19:58 (Reply)

   Again, thanks for the comment, JMG. But I’m going to have to disagree with you about not investing. When return rates on investing are higher than the rate of my wife’s student loans, it just makes sense to invest. Sure, the market goes up and down. That’s how it works. But from what I understand, in the long run, the market keeps going up.

   I was in the market back in 2001, and I took a big hit. But I kept my money in and still ended up doubling my investment after two years. I didn’t even contribute to my investment during the whole two years because I wasn’t working. From my experience, investing pays.

   Stay tuned. I’ll be posting on whether it’s a good idea to pay off your loans first or invest.I’ve read different opinions. I’ll look forward to your comments.

5. links for 2007-10-01 | The Frugal Law Student on 01.10.2007 at 00:22

   […] The Frugal Law Student » Blog Archive » If the news says a stock is hot it’s probably too late t… Frugal Law Student Retro: I tried buying gold after I read that it was hot. The next week the value of gold plummeted and I lost a couple hundred bucks. […]

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