Monday, May 05, 2014

Perils of Picking Stocks

by Jim Parker, DFA Australia

Investing for the long-term is not just about taking risks, but about understanding which risks are worth taking and which are not.
One persistent myth is that investment success depends on picking individual stocks. The media wants you to believe this myth because it’s harder to write stories about the broader forces that drive long-term returns.
1. The Re-Education of a Brash Young Stock Picker
You can get lucky picking stocks, but you don’t get lucky for long. In fact, those who pin their long-term wealth-building hopes on individual stock tips usually are mistaking speculation for investment. In this article from The New York Times, the writer focuses on some finance professionals who learned the stock-picking lesson the hard way.
2. Busting the Stock Picker’s Myth
Do you ever read in the financial press that “it’s a stock picker’s market”? This is a phrase used by traditionally active fund managers to justify charging you big fees for their supposed expertise. It’s true that sometimes these bets can pay off. But, equally, if you’re unlucky, you can build a big hole for your portfolio. This article looks at the evidence.
3. The Stock Promotion Sting
The growth in online financial media and the demise of traditional fact-checking journalism are providing opportunities for stock promoters to dress up product selling as financial advice. An investigation in the US found advertisements about stocks are being characterised as editorial. It’s another reason to be wary about stock-picking stories.
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