THE FOUR TYPES OF CONVENTIONAL INVESTING

PREDICT THE FUTURE

The most common approach is based on prediction and forecasting. Methods include:

These methods are based on trying to predict the future direction of the economy, the stock market, or an individual stock. This conventional approach assumes that someone has a crystal ball.

Many people think this is the key to successful investing. In fact, when people meet financial advisors or others in the investment business, their first question is typically, “where do you think the market is going?” They are basically asking that person to make a prediction. Yet, no one can know the future—and if an investment person could predict the market’s future direction, why would he share that knowledge for free?

A prediction about an uncertain future is just an opinion, and it should not determine anyone’s investment decision. Many people learn this the hard way.

ACT ON IMPULSE

Some people approach investing from an emotional perspective. They act impulsively—and their reaction is typically sparked by fear or greed.

Some may get anxious about the stock market and decide to get out. This may ease their fear, but it may be replaced by the anxiety of missing out on a market recovery. Investors who flee the market ultimately have to decide when to get back in.

The 2008–09 global market downturn offers an example of how the cycle of fear and greed can drive an investor’s decisions. Some investors fled the market in early 2009, just before the rebound began. They locked in their losses and then experienced the stress of watching the markets climb.

The other side of the emotional coin is greed. Investors can get anxious about missing out on what they perceive as a great investment. They may follow the crowd.

The idea behind investing is to buy low and sell high. Yet, following an emotional investment cycle sparked by impulsive decisions may bring an opposite effect: buying at high prices and selling at lower prices.

TIPS AND HUNCHES

Other people approach investing from a “get rich quick” perspective and act on tips or hunches. They may seek out investment insight from cable news programs that feature Wall Street experts who appear to know something valuable, or from other sources.

There’s also a social element to predictive investing. People like to talk about their winning investments, but they probably don’t mention the losers. People often follow the advice of friends, neighbors, or family—especially if the “insight” offers potential to make a fast, easy return. Most of this advice is just noise.

We all know deep down that there’s no shortcut to growing wealth. So why do people keep investing this way? In some cases, it is all they know.

LISTEN TO THE MEDIA

The financial and popular media define what investing is for many people. Whether the message is crafted by a financial publication, a website, or a cable program, it often targets human emotion.

Consider the messages in these sample headlines from major publications. Some prey on an investor’s fear and anxiety about the future, while others suggest you can tap into special knowledge to gain quick, easy wealth.

Investors who are tempted to act on these media messages should remember the media is selling entertainment, not real financial advice.