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PLEASE Don't Fall for This One

By Dr. Steve Sjuggerud
Monday, February 28, 2011

I usually keep my mouth shut on this idea... People don't want to hear it.
Why don't people want to hear it? Because they're most likely guilty of it.
You're probably guilty of this, too, to a certain degree. So I should keep my mouth shut.
Then again, if you're reading this, you're trying to become a better investor... And you need to know the truth.
You don't know me... So you might not appreciate it at first if I point out that your fly is down or that you have food stuck in your teeth. But after the initial look of horror, you'll correct it. And then you'll be thankful, I hope.
This is an important concept to understand... If you're guilty of this, it will keep you from making money. Worse, it could cause you to lose a lot of money. And if you don't change this behavior, you will lose money for years.
Let me start with a few examples. Then I'll tell you the simple concept and how to avoid it. Let's get started...
Have you heard this one before?
"The U.S. dollar is garbage right now! So I'm getting some money outside the dollar – and I'm putting it into euros."
The problem is, the people saying this usually don't know anything about the euro... They have no clue they could be moving their money from the frying pan into the fire.
Or how about this one?
"America is going down the tubes! So I'm putting my money into China – through Chinese stocks."
Ah, yes. Brilliant. Once again, the people saying this usually know nothing about the Chinese stock market. Once again, they could be taking money out of the frying pan and putting it into the fire.
The important point here is NOT about Chinese stocks or the euro currency. There are two important points:
1) Don't buy just any ol' thing out there, as an emotional protest.
2) Know what you're investing in.
It's fine if you think the U.S. dollar is garbage. But please, don't hurry out and buy euros in protest – particularly if you don't know anything about euros!
The truth is, you'd have been better off earning 2% a year on your U.S. cash than putting it into euros since the launch of the euro in 1999. A dollar is backed by "the full faith and credit of the U.S. government." But what country is a euro backed by? The U.S. might be swamped with debt. But have you done your homework on Europe? Just how much debt is Europe swamped with?
It's fine if you think China is rising and the U.S. is sinking. But is owning Chinese stocks the best way to capitalize on that?
The truth is, since 1992, Chinese stocks have lost one-third of their value. The MSCI China Index has fallen from a starting value of 100 in 1992 to around 67 today. Are Chinese companies a good value right now? How much do you know about the Chinese company you want to buy?
Again, my point is NOT about the euro or Chinese stocks.
My point is about something I hear all the time at conferences. I talk to people that have spent a ton of time researching why the U.S. is in trouble... And they're eager to put their money to work somewhere else.
Meanwhile, these folks have spent virtually zero time investigating what it is they're actually putting their money into. Quite often, it seems, they're going from the frying pan to the fire, without even knowing it.
Investing outside the U.S. is fine... I've been a strong advocate of it for my near-two-decade career. (Gold bullion is actually a way to "escape the dollar." So are some big dividend-paying companies that earn profits around the world.)
But buying stuff you have no clue about – mainly as an emotional protest against what's going on at home – that's when I see people get into real trouble.
Buy an investment on its merits. Make sure it stands alone as a good buy. Do these things, and you'll be fine.
It's a small point today. But it's an important one... one that way too many individual investors are secretly guilty of ignoring. Don't be one of them.
Good investing,

Further Reading:

Read more common-sense investing advice from Steve:
"These two rules force us to avoid two of the biggest mistakes investors make," Steve writes. "Our rules keep us in the money."
Steve shares "the recipe for big gains." It's two simple things you need to know to be a profitable investor.

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