Theres an old financial adage that you should invest in what you know.
It seems like decent enough advice, but there are a couple of reasons it can backfire.
Plenty of investors have said this, but the quote is usually attributed to Fidelitys Peter Lynch.
They become enchanted with these companies because theyre familiar with them.
The lack of diversification can make it tougher to ride out an industry downturn.
Its supposed to be about learning, not picking stocks based on limited knowledge.
Warren Buffett has offered similar advice about how you should never invest in businesses that you dont understand.
Yes, they may have started with things they knew.
Thats about as wise as buying Crumbs stock because you love their cupcakes.
And anyway, a better bet is to investfor the long-term with a buy and hold portfolio.
Its not as exciting, but it works.
5 Money Myths That Are Financial Nonsense| Bankrate
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