Follow the crowd and you'll end up on the financial scrap heap.
If you frequent any kind of investment or finance-related websites, you've no doubt run across a multitude of articles telling you how to invest in the new year. Of course, we've been guilty of that too.
So, there is no shortage of sources telling you where the next big money-maker in the market will be. But I'm here to tell you how to do just the opposite -- and lose big in 2010. Not everyone can be a huge investment loser, but if you follow these few simple tips, you'll be on the fast track to wallowing in red ink before you know it!
1. Blindly follow trends, just because everyone else is
When it comes to investing, nothing gets you behind the pack quicker than following the herd. Don't think about what makes sense for your portfolio or about current valuations -- just take your Uncle John's stock tips to heart.
For example, investors seem to have reacted to 2008's market swoon by rediscovering their love for bonds. In the US, according to Morningstar data, up to November of last year, bond funds saw inflows of $320 billion of new assets, while equity fund inflows remained relatively flat. It's a similar story in the UK.
While a flight to perceived safety is understandable in light of what the global economy is going through, bond investors are going to miss any further rebound by shifting assets out of the stock market too late.
In addition, interest rates will likely start rising sometime this year, which means bond prices really have nowhere to go but down. Moving significant portions of your portfolio into bonds right now seems like a sure-fire way to lag the market in the long run.
Likewise, make sure you jump head-first into the gold rush. Concerns over future inflation and general economic uncertainty have driven gold prices up tremendously in recently years.
Every man and his two dogs are talking about gold. Some of the more unsavoury ads are urging people to sell their gold jewellery and get on board the gold train -- a sure sign that gold is entering a speculative phase.
Perhaps gold prices have further to rise, but the truth is that over the long run, gold simply hasn't produced returns that are competitive with shares. There are some solid gold-related mining companies like Randgold Resources (LSE: RRS) and Hochschild Mining (LSE: HOC) that might be worth owning, but making sensible investments is a sucker's game.
People who want to lose money know they need to jump on whatever bandwagon is now leaving the station and ride it as long as the general public tells them it's a good idea.
2. Invest in whatever has been doing well lately
The stock market rally that started in March 2009 has been primarily focused on lower-quality companies and troubled names, including beaten-down financials such as Royal Bank of Scotland (LSE: RBS) and Lloyds Banking Group (LSE: LLOY).
But a rally can't be sustained indefinitely on the backs of companies with less stable financial conditions. I'm betting that higher-quality, blue-chip names are likely to be the next market leaders.
For example, top-tier pharmaceutical names like GlaxoSmithKline (LSE: GSK) and Astrazeneca (LSE: AZN) are reasonably priced options that are likely to benefit tremendously from impending health-care reform legislation in the US.
So if you're looking to lose money, that means that you should stay far away from shares like that and instead stick to higher-risk, small-cap names with shaky balance sheets.
After all, that's what's been doing well lately, and it's hard to shun a stock or area of the market that's doubled in the space of less than a year. So don't do the hard work of figuring out what sector or stocks are more attractive -- just extrapolate past performance into the future.
3. Be very afraid of the stock market
Investors have a notorious "buy high, sell low" mentality. After the market dropped in 2008-2009, suddenly cash was all the rage. Savings accounts attracted cash like never before as investors let their fear of the market take over.
Of course, most of the market drop was over by the time people moved to cash, underscoring the rear-view mirror approach to investing so many employ. Never mind that because the last decade was so pathetic for shares, the next 10 years are likely to be above-average years.
Just let your fears control you, and remind yourself that the market can't possibly do well over the long run. Stuff your money under the mattress and wait out the next decade on the sidelines.
No one knows exactly what the new year will bring for the economy or for the stock market, but if you want to enter 2011 with less money than you have now, following trends and chasing market performance are the surest ways to get the job done. It's up to you to decide whether you follow this path or step away from the herd and blaze your own trail in 2010.
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> A version of this article was originally published on Fool.com. It has been updated by Bruce Jackson, who has an interest in GlaxoSmithKline and Astrazeneca.
