Investing in the stock market is a fantastic way to build wealth, grow your savings, and prepare for retirement. But to earn as much as possible, it's important to have the right strategy.
How and where you choose to invest will largely depend on your personal preferences. Some investors prefer to buy individual stocks, for example, while others prefer index funds or exchange-traded funds (ETFs). Regardless of where you invest, though, there are a few common mistakes that could hurt your earning potential in 2022.
Image source: Getty Images.
Mistake No. 1: Not investing during periods of volatility
When the stock market takes a turn for the worse, it may be tempting to press pause on investing until it recovers. However, that can sometimes do more harm than good over the long term.
Although it may seem counterintuitive, market downturns are some of the best opportunities to buy more. Stock prices are lower, making it a smart way to load up on quality investments for a fraction of the cost. If you only buy when the market is thriving, you're buying when stocks are the most expensive. Over time, that could cost you more than you may think.
While it can be daunting to invest during periods of volatility, keep in mind that the stock market has a long history of bouncing back from downturns. As long as you're investing in the right places, there's a very good chance your portfolio will recover eventually.
Mistake No. 2: Pulling your money out of the market
In a similar vein, pulling your money out of the stock market altogether can also be a costly mistake.
In theory, it makes sense to withdraw your investments at the first sign of a downturn, then reinvest when prices are lower. But timing the market effectively is nearly impossible, and you could potentially lose a lot of money.
The stock market is unpredictable, and even the experts can't predict exactly when a downturn or a crash will occur. In many cases, stock prices will fall for a few days before quickly rebounding. If you sell everything and then the market immediately surges, you'll have missed out on those potential earnings.
On the other hand, if the market does crash and you wait too long to withdraw your savings, you could end up selling your investments for less than you paid for them -- thus locking in your losses. The best move, then, is to simply hold onto your investments and wait for the market to recover.
Mistake No. 3: Buying into short-term investments
This past year saw the rise of the meme stock, as investments like GameStop, AMC Entertainment, Dogecoin, and Shiba Inu skyrocketed to incredible heights.
It's hard not to invest in short-term stocks that have seen phenomenal growth, especially when there are plenty of stories about investors who became overnight millionaires by investing in the right place at the right time. However, making a lot of money with these types of investments is extremely difficult.
Getting rich with short-term investments like meme stocks requires an incredible amount of luck. These stocks tend to surge as a result of retail investors buying in droves to drive up the price, only to sell shortly after to make a quick profit. If you buy or sell too late (even by just a few days), there's a good chance the price will have plummeted and you may end up losing money.
A much safer option is to focus on investments with long-term growth potential. These stocks won't make you a millionaire overnight, but they are more likely to earn positive average returns over time. By choosing the right long-term stocks, investing consistently (even during downturns), and keeping your money invested for the long haul, you'll be well on your way to generating wealth that could last a lifetime.
