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Rule for Building Wealth: Don’t Chase Trends

This article was written by in Investing. 3 comments.


Here’s a continuation of the latest miniseries, based on Fortune Magazine’s 10 Rules for Building Wealth. Today’s declaration is, “Don’t chase trends.” Another term for this activity is timing the market, poorly at that.

If you see an asset class that’s catching fire – like real estate investment trusts (REITs) in the late ’90s or commodities this year, ask yourself some basic questions: Can I describe how it works in plain English?… Why is it so popular right now?

If you’re reading in the press about the hottest investment technique or philosophy, stock, or mutual fund, chances are you already missed that particular boat. By the time everyone knows about it — whatever “it” is — its market has become efficient; no more spectacular gains to be had.

Of course, it’s easier to say to be skeptical of anything that everyone is saying is a foolproof way to quick, high returns. You might as well invest in the penny stocks touted in mass email spamming.

Some observe that markets behave in cycles; the challenge is — if you really want to time the market — to invest against the tide. It’s a powerful current and most people will have difficulty swimming against its pull.

Published or updated December 15, 2006. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 3 comments… read them below or add one }

avatar dimes

REITs are still doing pretty well. My husband has them and I wish he’d diversify, but he’s not (geographically) in a position to do that right now. I hope they don’t bust in the next six months.

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avatar Nagel

I agree. Stay diversified and do not follow the “Herd.”

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avatar Matt

The only way to beat the S&P index is to buy things when they’re underpriced relative to fair market value in a sane environment. By the time you can read about a “trend” in the newspaper, see it on TV, find references to it in blogs, or have any other access by purely public means, the assets supported by that trend will be, at best, priced fairly. By that point, the bargains are gone.

To beat the average, you’ve got to find out what the NEXT trend will be.

And of course, the only way to know that for sure is to be in posession of the kind of inside information you can go to prison for using in stock trades. So chances are that, at best, you’ll be gambling on a guess. Way better odds than the lottery or even Vegas, but not what I’d call “investing”.

Which is not to say there’s anything intrinsically wrong with it. But don’t do it with money you can’t afford to lose.

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