Never has there been a time in market history when more people who think of themselves as investors were actually gambling with their money. From Wall Street to Main Street the lines are blurry. Just look at the trials of JP Morgan (JPM), where even the bank itself confused hedging risk with making an enormous bet; and Facebook (FB), whose IPO created a frenzy that has so far lost money for investors that rushed in. If it can happen to them it can happen to you. Mark Matson, the author of "Main Street Money" joined Breakout to discuss three signs that you're gambling with your money, not investing it.
1. Stock Picking
Matson says "the idea that you're going to have inside knowledge, or knowledge that nobody else has" and use it to pick stocks with better returns than the broader market is folly. Individual stocks are always more risky than a diversified portfolio. You're kidding yourself if you think otherwise. This rule applies not just to the go-to names like Apple (AAPL) but perennial value plays like Berkshire Hathaway (BRK).
Matson advises that instead of hand-picking your portfolio of five to ten stocks, you must be much more diversified with exposure to 11,000 global stocks.
2. Market Timing
"The trick to investing is not buy and hold, it's buy and re-balance," he says.
This means is keeping your portfolio mixed with equities and debt at whatever risk level you wish to have. For instance, if you want to have 50% stocks and 50% bonds, then when your equities post gains, your portfolio could suddenly become weighted 55% stocks. This would be a sign to fix your asset balance by selling some stocks and putting the proceeds back into debt until you got back to that 50-50 mix.
"You do want buy low and sell high, but you gotta do it smart."
3. Track Record Investing
Matson says most people decide they want their equity investments spread around in pools like small cap growth or large multinationals. Once that has been decided they go out and look for the mutual funds with the best track record in those specific sectors.
"The reality is 75% of all active fundmanagers fail to deliver market rate of returns and those 25% who get lucky have zero correlation about repeating in the future," he says. There's little if any connection between beating the market one year, and pulling off the same trick the next.
"Don't chase some hot stock picker or someone even with a 20 or 30 year record," Matson insists. This is the equivalent of betting on the jockey to win the horse race.
It's a far better strategy to own global index funds with low cost and widely diversified risk. "Remember, the returns come from the market, not the individual investor," says Matson.
Run through his list and see if you're applying these rules with your money. If you aren't, there's a good chance you're taking on more risk than you think.