Avoid These Investment Traps

There are several investments that you should avoid right now.

Firstly, if you're a millennial, experts advise against picking stocks, trading actively, or market timing. Instead, opt for a long-term investing strategy.

Secondly, when considering short-term investments, it's best to stick with less risky options such as high-interest savings accounts or Guaranteed Investment Certificates (GICs). These investments may not make you rich, but they provide stability and protect your money.

Thirdly, for long-term investments, it's crucial to assess your risk tolerance. While stocks can deliver fantastic returns, they are risky and volatile. If you're risk-averse, consider less volatile options like dividend stocks, value stocks, or target-date funds.

Finally, be cautious of investing in individual stocks, especially if you're a beginner. It's better to start with funds or ETFs to gain exposure to a diversified portfolio of stocks.

Remember, investing is a complex topic, and it's always recommended to consult a financial advisor before making any investment decisions.

Individual stocks

When considering which individual stocks to avoid investing in right now, it is important to assess the broader market and industry trends, as well as the fundamental and technical analysis of specific companies. Here are some insights on why certain individual stocks may not be ideal for investment at the moment:

Volatility and Market Conditions:

• Uncertainty and Risk Factors: The stock market has experienced a strong performance in 2023 and continued to build on those gains in early 2024. However, investors should be cautious due to concerns about inflation, interest rates, and the potential for an economic slowdown. The Russia-Ukraine conflict, the situation in Israel, and other geopolitical issues also add uncertainty to the market.
• Overall Market Performance: The S&P 500 has posted impressive gains over the past year, but that doesn't mean every stock in the index is a good investment. It's important to evaluate individual stocks based on their fundamentals and growth prospects.

Individual Stock Considerations:

• CVS Health Corp. (CVS): The pharmacy sector is facing challenges due to increased competition and changes in drug reimbursement and pricing. While CVS has a diverse business with its pharmacy benefits manager and insurance firm Aetna, investors should be cautious about the pressures on margins and the recent decline in CVS's stock price.
• Estee Lauder (EL): The cosmetics industry is going through a period of upheaval, with traditional distribution channels disrupted and inventory levels mounting. EL stock has declined significantly from its all-time highs, and while social media and influencer culture have boosted the demand for cosmetic products, investors should carefully assess if this is a temporary setback or a longer-term trend.
• Global Payments Inc. (GPN): The payments industry is experiencing a slowdown after the pandemic-driven boom in 2021. GPN stock has fallen recently, and investors should consider the competitive nature of the industry and the potential for further sell-offs.
• Baxter International Inc. (BAX): Baxter's stock has been in a downward spiral since 2021 due to the pandemic's impact on the market for medical devices and a shift in investor focus towards companies specializing in diabetes management and weight loss. While the stock may seem attractively valued, investors should carefully evaluate the company's prospects for a turnaround.
• Clorox Co. (CLX): Clorox experienced a surge in demand at the start of the COVID-19 pandemic, but excessive inventory levels and rising labor and input costs have since hurt its profit margins. Higher interest rates and a potential shift in investor preferences away from blue-chip stocks are also factors to consider.
• Meta Platforms (META): Meta Platforms, the parent company of Facebook and Instagram, has been spending heavily to secure a place in artificial intelligence. While it has strong technical performance and earnings growth, the stock is not far from its 52-week low, and Big Money has been a net seller of the stock recently.
• Goldman Sachs (GS): Goldman Sachs has strong overall performance and is a leader in the Banks-Money Center industry group. However, its earnings performance could be stronger, and investors should monitor how it manages expenses and revenue growth.
• Granite Construction (GVA): While Granite Construction benefits from the 2021 infrastructure bill and has a strong earnings history, investors should be cautious about the potential impact of economic slowdowns or shifts in government spending priorities on the construction industry.

Remember, it's crucial to conduct your own research and consult with a financial advisor before making any investment decisions. The above information is intended as a starting point for further analysis and should not be taken as investment advice.

Stock funds

If you're not quite up for spending the time and effort analysing individual stocks, then a stock fund – either an ETF or a mutual fund – can be a great option. A stock fund is an excellent choice for an investor who wants to be more aggressive by using stocks but doesn’t have the time or desire to make investing a full-time hobby.

However, there are some risks to investing in stock funds. A stock fund can still move quite a bit in any given year, perhaps losing as much as 30% or even gaining 30% in some of its more extreme years. If you buy a fund that’s not broadly diversified – for example, a fund based on one industry – be aware that your fund will be less diversified than one based on a broad index such as the S&P 500. So if you purchased a fund based on the chemicals industry, it may have a lot of exposure to oil prices. If oil prices rise, then it’s likely that many of the stocks in the fund could take a hit.

If you buy a broadly diversified fund – such as an S&P 500 index fund or a Nasdaq-100 index fund – you’re going to get many high-growth stocks as well as many others. But you’ll have a diversified and safer set of companies than if you own just a few individual stocks. By buying a stock fund, you’ll get the weighted average return of all the companies in the fund, so the fund will generally be less volatile than if you had held just a few stocks.

So, while stock funds can be a good investment, they are not without their risks. It's important to do your research and understand the potential downsides before investing.

Bond funds

There are several types of bond funds, each with its own advantages and disadvantages. Corporate bond funds focus on higher-quality, investment-grade bonds issued by companies and have a lower risk of default but tend to offer lower yields. High-yield bond funds, on the other hand, invest in bonds that pay higher levels of income but are issued by companies that are less likely to be able to pay off their debts. Strategic bond funds have the freedom to invest across different types of bond markets and may focus more on paying a high income or growing/sheltering investors' wealth. Global bond funds invest in government and corporate bonds worldwide and may have significant exposure to foreign currencies.

When deciding whether to invest in bond funds, it is essential to consider the potential risks and the specific type of bond fund being offered. It is also worth noting that bond funds should reduce the risk of default compared to investing in an individual bond due to diversification across multiple companies or governments.

Dividend stocks

Firstly, a high dividend yield is not always a good thing. While dividend stocks are generally thought of as safe, reliable investments, a high dividend yield can indicate that a company is returning too much of its profits to investors rather than reinvesting in the company's growth. This may be a sign that the dividend is unsustainable and could be cut in the future.

Secondly, dividend stocks are not always boring. While utility companies and other slow-growth businesses are often associated with high dividend yields, there are dividend stocks in exciting, fast-growing industries.

Finally, dividend stocks are not always safe. During the 2008 financial crisis, for example, many companies cut their dividend programs as profits plunged.

When choosing dividend stocks, investors should look beyond the dividend yield and instead focus on companies with durable dividends that are undervalued. It is also important to consider the dividend payout ratio, which measures the percentage of profits a company pays out to shareholders. A payout ratio that is too high may indicate that the company is going into debt to pay dividends.

In summary, while dividend stocks can be a great choice for investors seeking passive income, it is important to carefully evaluate the health and sustainability of the dividend before investing.

Value stocks

• Value stocks can be less thrilling than growth stocks, and they may not have as much long-term potential.
• Value investing requires a lot of research. You will have to do your homework by going through many out-of-favor stocks to measure a company's intrinsic value and compare that to its current stock price.
• The best time to buy value stocks is during economic downturns when the entire stock market is on sale. Given the current macroeconomic environment, it may not be the best time to invest in value stocks.
• Value stocks tend to be well-established and less volatile compared to growth stocks. In the current market, there are opportunities for value investors, but it is important to be selective and look beyond factors such as company size or investing style when seeking out high-quality companies.
• Kraft Heinz (KHC): The company has struggled to obtain the expected synergies from the 2015 Kraft and Heinz mega-merger, and the heavy debt load taken on to fund that deal has left the company struggling to find a new direction.
• Comcast (CMCSA): The company has struggled with cord-cutting as many people switch to streaming services, and its media properties, such as NBC, are seeing their profits slip as the media landscape shifts.
• Cisco Systems (CSCO): Cisco shares are depressed and trading at 52-week lows. While Cisco is not a glamorous business, it still offers networking equipment, software, and cybersecurity offerings.
• Berkshire Hathaway (BRK.A, BRK.B): Berkshire Hathaway is a conglomerate with more than 60 wholly-owned businesses and a massive stock portfolio. In his 2022 letter to shareholders, CEO Warren Buffett wrote that the company held $144 billion in cash and cash equivalents, and he later revealed that the company bought $40 billion worth of stocks in the three weeks after the letter was released.
• Procter & Gamble (PG): Procter & Gamble is a consumer products manufacturer with well-known brands such as Gillette, Tide, and Crest. It has been able to steadily add to its revenue over time and has become one of the most reliable dividend stocks in the market. However, management expects sales growth to slow in fiscal 2023.

Frequently asked questions