Mistake No. 1: Going to cashI get lots of emails from people who are fully invested in cash. I know that many market pundits are in cash as well. In terms of basic investing philosophy, I disagree with this position. While I understand the need for a reasonable amount of cash in a portfolio, I'd rather purchase undervalued businesses that generate free-cash-flow yields well above the 2% yield that money market funds earn. Several of the companies that I've highlighted for RealMoney readers fit the bill, such as Liz Claiborne ( LIZ), Ethan Allen ( ETH) and Raymond James Financial ( RJF).
Mistake No. 2: Owning an S&P index fundI know this market is tough, but don't make the mistake of socking your money away in an S&P 500 index fund and forgetting about it. This cycle is all about selectivity. You can make a buck or two if you're in the right companies at the right price. But buying into a broad-based fund that's excessively exposed to overvalued big-cap growth -- like S&P index funds -- is a prescription for mediocrity at best and for substantial capital losses at worst.
Mistake No. 3: Owning companies with suspect managementThere are enough compelling ideas in this market to warrant eliminating companies with suspect management. I've warned investors in blunt terms -- in a column
Mistake No. 4: Owning companies with phantom earningsThere's no reason to own companies that produce low-quality, suspect earnings. The last cycle was marked by the unreal; this cycle is about
- Include gains in net income, like Intel ( INTC)