Three questions to ask yourself before you invest your money
The first question to ask yourself before investing is: Is there any reason besides the record to think this should work? This is important because companies will market large returns based on backtesting thousands of strategies they have tested where maybe four tend to offer a great return. You need to consider these things when trusting someone else with your money. Stock advising services offer a lot of products with great returns but you need to consider these three questions before purchasing one of their or another company’s products.
Learn about backtesting tricks and two other questions to ask yourself before investing.
1) Is there any reason besides the record to think this should work?
Robert Novy-Marx, a finance professor at the University of Rochester, has found that some patterns that seem to predict stock prices work better when Mars and Saturn are in conjunction, and that market manias and crashes may correlate with sunspots. His point being not that these are smart trading strategies, but that you should be very, very careful with what you try to do with statistical patterns.
There’s no good reason to think Mars affects stock prices, so you can safely ignore astrology when putting together your 401(k). Likewise, if someone tells you that, say, a stock that rises in value in the first week of January will also rise in value in the third week of October, you might want to get them to explain their theory of why that would be.
Anyone with charting software can backtest a strategy and claim to have made thousands of dollars. Just keep in mind some patterns are actually proven like the cup and handle pattern if you have studied technical investing. The difference is these are patterns recognized and accepted by the market and traders everywhere. A strategy accepted by the market and a majority of traders is the key difference between a strategy that might work and one that definitely will.
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About Shaun Archer Tatum Shaun works in corporate finance in New York City. He has done financial consulting for several start-ups and has worked at several Fortune 500 companies. He has contributed several finance/investing articles on Seeking Alpha which have been published on Yahoo! Finance.