We’re in the “dog days” of summer — traditionally the hottest, steamiest time of year. But in a few weeks, the temperatures will begin to cool down.
Nature isn’t alone in this heating-and-cooling pattern. You also can find evidence of it in the investment world. To be specific, today’s “hot” investments can lose their sizzle quickly, which means that as an investor, you’ll need to take steps to avoid being left out in the cold.
An investment can become “hot” — that is, its price can shoot up — for any of a number of reasons. For example, a company that provides a well-known product or service may decide to “go public” by making its shares available to investors. When this happens, the stocks become “hot” for a while.
An investment also may become hot if a favorable event occurs, as might be the case with a drug company that gains permission to sell a medicine that’s much in demand. And some investments heat up because an “expert” is touting them in the media.
Although different investments may get hot for different reasons, they all share one thing in common: They will cool off. In fact, by the time you and many other investors hear about a hot stock, it already may be cooling off. If you buy into an investment that’s been hot for a while, you should recognize that its “upside potential” may not be what you think.
To help achieve your financial goals, you may be better off by not chasing after hot stocks. Instead, consider these ideas:
• Increase share ownership. One key to building wealth is to increase the amount of shares you own in your investments. Hot stocks often are expensive stocks, so you may be limited in the number of shares you can purchase.
As an alternative, look for quality investments that are trading at reasonable prices. You also might consider buying additional shares in quality companies you already own.
• Buy appropriate investments. Even if you can afford to buy some shares in hot stocks, should you? These stocks may not be suitable for your needs, for any number of reasons: too risky for your risk tolerance, too similar to other stocks you already own and so on.
You need to own investments that are appropriate for your individual needs. Of course, you also need to keep in mind that any investment in stocks — whether hot or not — will fluctuate with changes in market conditions and may be worth more or less than your original investment when you sell.
• Diversify your holdings. By continually pursuing hot investments, you might end up with an unbalanced, non-diversified portfolio. By diversifying your holdings, you can help reduce the effects of volatility on your portfolio. However, diversification, by itself, cannot guarantee a profit or protect against loss.
• Think long term. Chasing hot stocks strictly is a short-term move. Successful investors adhere to long-term strategies that require discipline, patience and a constant focus on the future.
By following these suggestions, you’re unlikely to experience the thrill of chasing after hot investments, but you will get the satisfaction of building a portfolio designed to help meet your important investment goals.
Cardella is an investment advisor for Edward Jones, which provided this column.