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.