Finding Good Investments Rarely Comes from Following Investor Clichés or Sayings

To find good investments, avoid investor sayings and instead follow proven strategies and concepts like the tips we give you here

Most investor sayings and clichés have at least a hint of truth. But they can still lead you to make bad investment decisions, depending on how you apply them.

Looking for advice on making good investments? We share some tips below, in addition to providing a closer look at one investor sayings that you need to understand more clearly.

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You’ll sometimes hear investors say that you shouldn’t fall in love with your stocks. This seems to make sense. You should keep an open mind on your investments, rather than fall in love with them and hold them forever, despite any adverse changes in their business or the field in which they operate.

However, investors sometimes use this tidbit of advice as a justification for selling a stock that has shot up unexpectedly.

It’s easy to jump to the conclusion that unexpected strength in a stock won’t last. Friends, brokers and cable-TV commentators may advise you to “take some money off the table”—that is, sell all or part of your market-beating stock pick. They may justify this advice by informing you that “you never go broke taking a profit,” and that you can always “buy it back on a dip.”

In fact, unexpected strength in a stock you like is a terrible reason to sell. The stock may be stronger than you expected because you underestimated the growth potential or competitive advantages that led you to like it in the first place.

Experienced investors can tell you that some of their best stock picks started going up out of proportion to what they expected, and kept out-performing for years. By the time the first significant “dip” or setback comes along in a stock like this, it may have tripled.

Remember, no one can consistently predict which stocks will be average performers, which will be losers, and which ones will turn into the superstocks that wind up rising five-fold, 10-fold or more. You may avoid some temporary losses if you sell every stock you own that goes up faster than you expected. But do that, and you will also sell any superstocks you stumble upon, often when they are just getting started. You need a few superstocks during your investing career, to make up for the inevitable losses.

When a stock you own is unexpectedly strong, resist any immediate impulse you feel to sell, even if you like the idea of “nailing down a profit.” Instead, look at it closely. See if you can find any good reason to sell, apart from the fact that it’s beating your expectations.

If you can’t find any good reason to sell, hang on to it. Maybe your expectations are just too low.

Good investments to make: Spinoffs

Companies undertake spinoffs when they feel it isn’t a good time to sell a division or subsidiary. That probably means it’s a good time to buy.

When a spinoff begins trading, it stands to reason that investors will put a low price on it. After all, the spinoff hits the market with a large number of neutral, if not reluctant, stockholders who have limited expectations for it, and who are willing to sell when they get around to it.

One group of investors who might be willing to buy a new spinoff are seekers of undervalued stocks. On the whole, it pays to follow the lead of these value seekers. You should also have the patience to hang on through a period of sluggish trading, while reluctant spinoff holders exercise their urge to sell.

Good investments to make: Stocks with a dividend-paying history

If you stick with top-quality high dividend yield stocks, the income you earn can supply a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.

Note, though, that when it comes to investment safety, a long history of steady dividends is a better indicator of value than a current high dividend yield.

In short, good dividend stocks are a valuable component of any sound investment portfolio.

Good investments to make for retirement investing: RRSPs and RRIFs 

RRSPs (Registered Retirement Savings Plans) are a great way for investors to cut their tax bills and make more money from their retirement investing. RRSPs are a form of tax-deferred savings plan. RRSP contributions are tax deductible, and the investments grow tax-free. When you later begin withdrawing the funds from your RRSP, they are taxed as ordinary income—usually at a time when your income and tax rate is lower.

Registered Retirement Income Funds (RRIFs) are also a great long-term retirement investment planning strategy. Converting your RRSP to a RRIF is clearly one of the best options at age 71. That’s because RRIFs offer more flexibility and tax savings than annuities or a lump-sum withdrawal. Like an RRSP, a RRIF can hold a range of investments. You don’t need to sell your RRSP holdings when you convert—you just transfer them to your RRIF.

Which investor sayings or clichés do you find to be frequently inaccurate?

Have common investor sayings ever led you into making poor investment decisions?


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