3 Investing Traps to Avoid in this Market

July 7, 2014
David Bartosiak

With the S&P 500 and Dow Jones Industrial Average at all-time highs, the market's sleepy crawl upwards can lure investors into making bad moves.

This article was originally published by Zacks.com.

Like the old Atari game Pitfall, this market is full of traps that investors can easily fall into.

With the S&P 500 and Dow Jones Industrial Average at all-time highs, the sleepy crawl upwards can lure investors into making bad moves. In this article I've identified 3 ways the market can trick you into losing money.

1. Blindly buying dips

It may sound easy enough to jump in and buy a stock on a pullback in this market. After all, the practice has worked very well during the stock market's run we've seen off the lows of March 2009. However, as we reach higher highs, the market is likely to become more discriminatory. That is, sector selection and individual stock selection will become increasingly important.

Buying a stock just because it pulled back could prove to be quite dangerous. When buying on a pullback, it's important to make sure there has not been a change in its long-term trend. The pullback could mark the end of a trend and not just a retreat to a support level, especially in the short-term.

Always remember: "The trend is your friend, until it ends."

2. Chasing winners

While buying that hot cloud-based technology stock or electric car company may sound like a great idea, it's also a great way to lose money. We've all heard the old adage: "Past performance is no guarantee of future results" and it couldn't be truer when it comes to individual stocks.

The stock market is always looking forward to the next quarter's and next year's results. Earnings stories that were great in Q1 could quickly reverse as Q2 results and guidance are announced. Make sure you investigate these earnings pictures and outlooks before you jump onto last quarter's winners.

3. Taking profits too soon

While nobody wants to let a winner turn into a loser, it's equally as important not to cut off your nose just to spite your face. Let your winners run and cut your losses short. By selling a stock just because it's made a large run, you could be leaving a tremendous amount of money on the table.

Treat each day that you own a stock like it's the first day you bought it. Always have a stop-loss where you will take your risk off the table. You can move this stop-loss up as the stock moves up. This way you maximize your potential gain along the uptrend of a stock. Nobody wants to be the investor who sold Google at $250 just because he or she thought it went up too fast.

Easy trap avoidance

These are 3 of the biggest mistakes an investor can make in this market we have today. Perpetually higher highs can give investors a false sense of security that Mr. Market can easily snatch away at the drop of a dime.

David Bartosiak is Zacks' resident technical and momentum expert.

The information supplied above by Zacks Investment Research Inc. contains opinions based on factual research which may or may not be accurate. Neither Zacks nor Intellisphere will assume any liability for losses from investment decisions based on this information.

The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.