Dumb Money Move No. 5: Buy some stocks that have fallen dramatically in price

Posted Aug 7th 2008 1:30PM by Daniel Solin
Filed under: Personal Finance

This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.

The financial pundits are in a feeding frenzy.

When oil was soaring, they told us to buy energy. When it dropped, they told us that energy stocks were "old news."

When financial stocks were tanking, they told us to dump them. Now they are telling us to buy them because this is a "buying opportunity."

Don't take the bait.

They have no idea whether a stock is poised to take off or about to plunge. Neither do I. That is the point. No one does.

Here is what we do know.

The stock market is random and efficient. Stocks are efficiently priced because all information about them is in the public domain, scrutinized by hundreds of thousands of amateur and professional investors every second of every day.

What drives stock prices is not yesterday's or even today's news. This is the secret the media, with all of its "analysis" and breathless reporting, does not want you to know.

Stock prices are affected by tomorrow's news. Since that is unknowable, opinions about "buying opportunities" are no more reliable than a roll of the dice.

For most investors, buying individual stocks is a bad idea. If you focus your portfolio on a concentrated position of stocks, you are increasing your risk significantly, but are unlikely to be rewarded with returns that will exceed those of a well diversified index fund.

The next time a self-styled "financial expert" talks about a "buying opportunity" in a stock or a sector, just tune her out. Instead, focus on your asset allocation and invest in a globally diversified portfolio of low-cost index funds.

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books, 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, 2008).

Tags: index funds, IndexFunds, investing

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Reader Comments (Page 1 of 1)

8-20-2008 @ 1:17AM

omri markovitch said...

hello!
I want to ask you guys about banks stocks,iam talking about big banks as city bank and bank of america.
they were very solid in the past ,dont you think that they will stand up again in the long term?
isn't it good stocks to buy for the long term?