Falling Knife

Talk about catching a falling knife. Nortel Networks, the Canada-based telecom giant, had been trading for around 100 Canadian dollars per share and then started heading south. When shares were at CA$33, I thought, “What a bargain!” and discussed it with my financial adviser, who thought it was a great idea. I bought in, and ended up selling at CA$3 per share before the company went bankrupt. And worse, this all happened in a taxdeferred account. Waah! This was just another nail in the financial adviser coffin for me, because I have yet to employ one who ever said to me, “Leon, that is a really stupid investment idea.” They always said my ideas were great. I am a lot wealthier since dumping them and doing my own investing. — Leon H., online The Fool Responds: Such losses can be extra annoying when they occur in IRAs or 401(k)s, as you don’t get to use the losses to offset taxable gains, shrinking your tax bill. (But those accounts offer tax advantages, too, such as deferring taxation until withdrawals in retirement — or, with Roth accounts, avoiding taxation altogether.) A key mistake here was buying into a stock that was plunging, as that typically signals trouble. If your research had suggested that the troubles were temporary, investing could have been worth a shot. But Nortel was struggling, with its cash running out. You’re lucky to have not lost your entire investment.