It was a wild and wacky 2001 on Wall Street.
And Wall Street 2000 was no picnic either.
So you'd think by now that investors would have learned a thing or two about declining markets and their portfolios.
Yet it doesn't seem like the basics have completely sunk in yet. (And stashing cash under your mattress isn't one of them.)
If you lost a lot of money last year, chances are you made some boneheaded investment moves.
Can't think of a single one? We'll jog your memory. Here are five common blunders experts say investors made last year:
Falling in love
Love stinks, especially when your $100 "can't miss" stock now trades at $15.
But investors are loath to part with these has-been gems because they believe they'll regain their former luster. Think Cisco. Broadcom. Lucent. They were once the darlings of Wall Street, and investors couldn't get enough of them. Then the share prices started to dive. And kept going.
Unfortunately, many investors last year didn't have a strategy for getting out of a declining stock, said Laila Marshall Pence, a certified financial planner with LPL Financial Services in Tustin, Calif. Instead of selling when the share price hit a certain point, investors wouldn't let go.
"They added to their misery and bought more instead," she said. Why? "Because investors relate to where the stock was trading," she said. Many believe if the stock once traded for $100, it will trade there again.
Buying based on past performance is tricky these days, Marshall Pence said, because many high-flying stocks were horribly overvalued. Although the fundamentals of a company like Cisco remain in place, the stock will probably never again attain its $80-per-share peak because that price was inflated, she said.
Investment tip: For 2002, devise a plan that spells out at what level you will get out of a stock. Set parameters and stick to them. Marshall Pence said she sees some investors come up with a strategy only to let greed and emotion cloud their plan.
Listening to analysts
You never listened when your folks (who actually cared about you) told you anything. But investors often latch onto every word that analysts utter in the media and then sink their hard-earned money into investments recommended by these complete strangers.
Big mistake. Just ask Mike Cunningham, who found himself paying for listening to an analyst.
Cunningham, a 54-year-old Costa Mesa, Calif., resident, felt he'd found a "sure thing" when an analyst said last year that StarBase, a Santa Ana, Calif., developer of Internet software, was a $35 stock. At the time, StarBase was trading around $9.50 a share, so Cunningham put $8,000 into the company.
The stock never hit $35. In fact, it went the opposite direction and today trades at about 70 cents a share.
Remember, analysts don't have crystal balls or any special intuition that tells them when to issue a "buy" recommendation. However, many do have a stake in what they're analyzing. Analysts often own the very stock they're pitching. The brokerage that hired the analyst might have been the underwriter on the company's initial public offering. So, to simply base your investment selection on the recommendation of what is essentially a salesman is highly suspect, experts say.
Cunningham now realizes this. He's watched as the $8,000 has dwindled to about $700 today.
Investment tip: Take analyst recommendations with a grain of salt. Take responsibility for your own investments and do the research. It's OK to weigh what you find against analyst recommendations. But don't base your investments on the advice of one analyst, one TV show guest or one person quoted in a magazine article.
Keeping a lopsided portfolio
Diversification and asset allocation. Investors yawned at the concept during the bull market of the 1990s. After last year's dismal stock market performance and crash of the technology sector, you'd think folks would have rushed to get a thoughtful balance of investments into their portfolios. After all, we're talking mostly retirement money here. But many investors are still getting it wrong, experts say.
"I can't believe how many people are still into growth stocks," said Scott Dauenhauer, a certified financial planner and president of Meridian Wealth Management in Irvine, Calif. Investors should have a portion of their portfolio in growth, he adds, but not everything.
"They may own five different funds, but if they are all large-cap growth, they are not diversified," he said.
A diversified portfolio needs to have growth and value, small and large cap, domestic and international stocks, as well as bonds and cash, Dauenhauer said.
Investment tip: Talk to a certified financial planner or investment adviser and have them help you properly diversify your investments based on your age, retirement goals and risk tolerance.
Eyeing the market's move
The balance in your retirement portfolio or 401(k) is often just a click away on the Internet, so it's easy to see how your investments are doing at a moment's notice. That's been a big problem this year, said Mitchell Keil, a certified financial planner at Integrity Financial Advisory in Fountain Valley, Calif.
"You now have employees checking their accounts on a daily sometimes hourly basis," he said. They also compare notes with other co-workers, who generally know absolutely nothing about investing.
This often leads to frequent trading, which creates tremendous whipsawing in 401(k) accounts, he said.
The danger in tracking day-to-day changes in your portfolio and talking to your co-workers about their so-called investment tactics is that you wind up chasing performance in the short term. You also wind up trying to guess the next move in the market.
Investment tip: Stop checking your portfolio every day. Most financial experts recommend examining your statements on a quarterly basis. And stop jawing with your office workers about so-called brilliant investment strategies. Pulling your money out of the stock market and moving it into a money-market account may be your friend's idea of a great move. But would you follow him/her over a cliff, too?
Too much company stock
You think a company looks great and so you load up on the shares. This is a particularly attractive deal if the company you're investing in is your employer. Lots of folks have faith in their employer so they wind up with tons of company stock in their 401 (k). However, putting the bulk of your investment into your company is the same as putting all your money into one stock or one mutual fund. It's a huge risk.
"Look at your company stock allocation as an aggressive investment. If you are conservative by nature, and you want to have an allocation to company stock, you want to keep it to 10 percent or less," said Doug Fabian of Huntington Beach, Calif.-based Fabian Investment Resources.
No one ever thinks bad things will happen to their company, either. But they do. Take Enron Corp., the giant Texas-based energy firm. It recently filed the largest bankruptcy in U.S. history.
Many of its employees, like 44-year-old Dave Childress, now with Chevron in Costa Mesa, Calif., loaded up on Enron stock in their 401(k)s.
"Most of us were long-term investors," Childress said. But nothing could prepare him or others for the fallout. Childress held about $400,000 of Enron stock in his 401(k) at the beginning of the year. It is now worth $1,000. "I did diversify slightly in another Enron company, but I had the majority in the main company," he said. Childress feels somewhat fortunate in that he has other retirement investments outside the company and doesn't beat up on himself too much for the mistake.
Investment tip: "Never have, under any circumstances, more than one-third of your portfolio allocated to company stock," Fabian said. Sometimes companies only make employees eligible for matching funds if they accept company stock. If that's the case, employees can get the company stock, but then sell off the company stock and reallocate to other 401(k) options, Fabian suggests.
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