The Worst Move You Could Make Now

The Worst Move You Could Make Now
By Dan Caplinger April 13, 2009 Comments (0)

Tough times have forced many people to take desperate measures. Unfortunately, some of the changes people are making to their portfolios won't do anything but cause them more heartbreak in the long run.

With many pundits proclaiming the death of buy-and-hold investing, day trading and other short-term investing strategies are on the rise. Having become immensely popular during the tech boom of the late 1990s, day trading has sent many investors to the poorhouse whenever the stocks that traders use stop performing well.

Tired of losing

Given the complete collapse in confidence in the financial system, it's no surprise that investors are taking matters into their own hands. When stocks move smoothly up over time, slow and steady gains generally make most investors happy. But when you no longer believe that simply dumping money into an index fund will earn you profits over time, you may well be at a loss to figure out what to do.

That's why day trading can be so attractive. If you pick the right stocks -- especially low-priced beaten-down shares like Citigroup (NYSE: C), General Electric (NYSE: GE), and Ford (NYSE: F) -- you can see plenty of potential benefits: With these companies in the news all the time, their prices move radically over short periods.

Low share prices let you pick up more shares for your money, accentuating the feeling that you're accomplishing something with your actions.

In an economy where many have lost their jobs, grabbing a quick profit from a day trade can be your only source of income.

But even if Wall Street's shenanigans have convinced you that the overall stock market is rigged, trying to beat the Street at its own game isn't the answer. Fortunately, there's a better way.

What's the better way?

Long-term investing strategies give you simple rules to follow in good times and bad. But to use them correctly, you have to be willing not to panic during bear markets, and add money even when your gut tells you it's the worst move you could make.

That's a big problem for many people. It's hard to invest when you know you could endure losses for months or even years at a time. But rather than going all the way to the other extreme by day trading, why not instead look for stocks that can thrive in today's market environment?

With thousands of stocks to choose from, you can be virtually assured of finding some with promising prospects. More importantly, though, when you understand why you own shares of a company, it's easier to be patient and wait for a great business model to prove itself.

For instance, consider e-commerce giant Amazon.com (Nasdaq: AMZN). When its shares fell to single digits during the tech bust, day traders lost fortunes. But those who believed that the company would eventually become the dominant force in Internet retail didn't settle for nicking a penny or two off share gains -- they saw their fortunes rise more than 13-fold in the ensuing years.

Take a stand

Which stocks belong in your portfolio? It depends on your financial situation, risk tolerance, and comfort level with investing, as well as your take on what the future likely holds.

If you're convinced the recession is just getting started, then a dividend-paying recession-proof consumer stock like Kimberly-Clark (NYSE: KMB) looks awfully attractive. On the other hand, if you're comfortable taking risks and see the economy booming back in short order, then beaten-down oil and gas stocks like Chesapeake Energy (NYSE: CHK) or ConocoPhillips (NYSE: COP) could recover in a hurry.

The key, though, is to take ownership of your investments. Rather than day trading, where all the odds are stacked against you, the best way to beat Wall Street at its own game is to learn how to play it better. By learning how to find market-crushing stocks, you'll avoid the mistakes that will inevitably bring day traders even more losses.

For more on making the most from your investments, read about:
The greatest company in the history of the world.
Wall Street's 10 favorite stocks.
Warren Buffett's biggest mistake.


Fool contributor Dan Caplinger makes plenty of mistakes, but does his best to avoid the big ones. He owns shares of Chesapeake Energy and General Electric. Kimberly-Clark is a Motley Fool Income Investor selection. Chesapeake Energy is a Motley Fool Inside Value pick.

http://www.fool.com/investing/general/2009/04/13/the-worst-move-you-could-make-now.aspx