The great lockdown necessitated by COVID-19 has caused both economic chaos and stock market volatility. Unfortunately, the decisions you make during these turbulent times could have a far-reaching negative effect on your retirement security if you make the wrong ones.
The good news is, you don't have to make investing mistakes that reduce your retirement nest egg. You just need to know how to avoid them, including these three big errors that could end up hurting your efforts toward investing for a secure retirement.
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1. Investing in stocks you don't understand
Whenever a crisis happens, it's tempting to try to capitalize on it by investing in companies that could profit from it. Whether that means buying into a pharmaceutical company testing vaccines, or purchasing shares of streaming services or teleconference technology, it may seem as though there's ample opportunity to benefit by buying the stocks everyone's talking about at that particular moment.
The problem is, if you don't understand the companies you're buying into, there's a good chance you could make a bad investment. What looks like a promising trial for a vaccine, for example, may be way over-hyped, but you may not know it if you don't regularly invest in pharmaceutical stocks and you can't effectively evaluate the information being presented.
Instead of reacting based on rumors or stepping way outside your comfort zone, stick with companies you know how to evaluate. Or if you do want to venture out into a new sector, take the time to do the research and do it right. Otherwise, you're basically just gambling with your retirement money, and those funds are too important to make a bad bet with.
2. Reacting based on fear
While some investors jump in too quickly during a crisis in hopes of making a quick buck, others have the opposite problem: They pull their money out of the market or stop putting more in because they're worried about the volatility.
The problem is, reacting based on fear often means you're selling after you've already suffered losses, and you take a big chance of missing out on an inevitable recovery. You also miss out on the opportunity to buy stocks at a bargain when good companies have shares on sale because of outside economic conditions.
If you're tempted to react based on fear, and panic sell or cut back on investing, remember the wise words of Warren Buffett: "Be fearful when others are greedy and greedy when others are fearful."
3. Trying to time the market
If you're hoping to earn better returns on your retirement investments by buying stocks at the very bottom during a crisis or selling at the highest peak during a rally, chances are good you're probably going to be disappointed.
No one can predict when stocks will hit their lows, especially during an unprecedented situation like this one. If you try, there's a good chance you'll miss out on buying opportunities entirely. And while it may be tempting to cash in when you've made a good profit, you may miss out on gains to come if you sell prematurely.
Long-term investors don't try to time the market, and you should be a long-term investor when you're saving for your retirement. You're much more likely to make money by regularly buying and holding shares of companies you believe in, regardless of what outside events are going on, rather than hoping to get in and out of a volatile market at the perfect moment.
Avoid these mistakes to keep your retirement investing on track
Fortunately, these mistakes are easy to avoid. If you follow basic investing principles, such as investing in what you know and only buying stocks you want to hold for the long term, you can do well investing both during the coronavirus crisis and beyond.
