Avoid Popular Stocks like the Devil

TheStreet.com

NEW YORK (MainStreet)—Buying the popular stocks or initial public offerings touted by institutional investors or popular traders may appear to be a good opportunity.

Since the companies are well known and highly publicized, it seems like their stocks are a good purchase, because their products are often used by the masses.

Financial advisors and other experts advise that investors shy away from imitating their moves and instead focus on purchasing mutual funds, exchange traded funds or other investments which provide long-term growth.

The majority of your investments should be in mutual funds, advises Heriberto Latigo, a Houston, Tex. trader for a private oil trading company.

"You want mutual funds, so it is easier to diversify risks," he said. "Mutual funds are actively managed. The flexibility is perfect for the majority of the investors."

Investors should research whether the mutual funds are a value or growth play, said Andrew Valentine Pool, a portfolio manager for Regatta Research & Money Management, LLC, which is based in New Orleans. He recommends purchasing a mutual fund index.

"Let the portfolio managers of the mutual funds do all the work, because it helps you spread your risk around," he said.

John McDonough, president and CEO of the Studemont Group based in The Woodlands, Tex., recommends that investors buy exchange traded funds, because they trade like a stock. Mutual funds only price at the end of the day after the markets close.

"Timing a market is fool's gold," he said. "There is so much risk that you don't know about."

While buying Google or Facebook's stocks seem like a good opportunity to make some cash, Latigo said most individuals need to stay away from purchasing stocks unless they have $250,000 in liquid investments.

"This is my mantra," he said. "I don't recommend anyone buying stocks."

Stick with mutual funds to diversify your risks, Latigo recommends. Some mutual funds are flexible and even allow you to trade daily.

Otherwise, an individual investor would need to purchase 12 to 15 unrelated stocks from their discretionary income. After broker costs and commissions, most investors are not likely to "gain any traction," because they will not be able to purchase many shares of each stock, he said.

Some investors purchase stocks in the industry that they work in, because they believe they have the inside scoop on how the company is being managed, Latigo said.

"It's like a more appealing and sexy taking the risk of gambling," he said. "You think you can sort of beat the market, because you know a little more about the performance of the company."

Other investors are day trading and believe they can obtain stellar returns, said Latigo. Since 60% of the stock market runs in trends or business cycles and the remaining 40% is in technical trading, most investors will have a difficult time assessing the right timing.

"There are so many moving parts to calculate and take that risk and make money," he said. "Getting into a trend at the right time is hard. Most people don't have that time to do research. People do it, because they are not really aware of the true method of the way the markets run."

If you choose to purchase a stock, then you should select one with a solid track record or history, said McDonough. Investors should choose a stock where they agree with the long-term approach of the company, so the purchase can be a "solid investment and cornerstone of your portfolio."

"Buy it, hold onto it and never let go," he said. "The market is so efficient with technology and information that the market moves in nanoseconds. By the time we hear something on the news, the price fluctuation has already been factored into the price. The market is just that efficient now."

Purchasing the stock when a company goes public can be an extremely risk move, Pool said. Some companies do not have a long history of their revenue or a profit, so buying shares of an IPO is a speculative play, Pool said.

McDonough recommends avoiding IPOs if you are not an institutional investor and waiting 12 months to check the performance of a company before considering a purchase.

--Written by Ellen Chang for MainStreet

EXCLUSIVE OFFER: See inside Jim Cramer’s multi-million dollar charitable trust portfolio to see the stocks he thinks could be potentially HUGE winners. Click here to see his holdings for FREE.

View Comments