Whether you're a seasoned investor or are new to the fold, a misstep or two could really cost you. While we all make mistakes, knowing what pitfalls to avoid as an investor could save you serious money. Here are four silly blunders to steer clear of.
1. Selling off investments during a stock market crash
It's natural to panic when the stock market tanks and investment values plunge. In that scenario, you may be inclined to sell off some of your stocks to staunch the bleeding. But remember that stock market crashes aren't actually all that uncommon, and that the market has a strong history of recovering from downturns. If you leave your portfolio alone during a stock market crash and wait for investment values to recover, you may not lose a dime.
2. Investing in companies or products you don't understand
There are plenty of innovative or value-producing companies out there that trade publicly. If you don't understand their business models or how they make money, then they're probably not great fits for your portfolio.
Take real estate investment trusts (REITs), companies that run or finance income-producing real estate. Investing in a REIT is a good way to diversify a portfolio and dabble in real estate without actually having to go out and buy buildings. But if you don't understand how they work, you may want to pass. Even better, educate yourself and then make a decision one way or another.
3. Only investing when stock values are up
When stocks are performing well, you may be more incentivized to invest compared to periods when they're underperforming. Limiting yourself to only investing in bull markets means you could miss out on some key opportunities. A better bet is to commit to investing at predetermined intervals ahead of time. It's a strategy known as dollar-cost averaging, and it's been shown to help investors pay a lower average share price for the stocks they buy than what they'd pay by attempting to time the market.
4. Not investing in a tax-advantaged fashion
There's nothing wrong with opening a brokerage account and using it to buy stocks, but you may not want to limit yourself to just a brokerage. In fact, it pays to invest in a retirement plan like an IRA or 401(k) for the tax benefits. With a traditional IRA or 401(k), investment gains in your account are tax-deferred until you take withdrawals. With a Roth IRA or 401(k), investment gains are yours to enjoy completely tax-free. That's a lot of savings to pass up, especially when you consider that with a traditional IRA or 401(k), you also get a tax break just for making contributions.
Investing is a continuous learning experience, and you may find that you get better at it year after year. Avoiding these mistakes could be the key to safeguarding your wealth, so keep them on your radar.