A lot of people make investing mistakes, especially in times of high volatility and market uncertainty. The good news is, if someone else has already made those mistakes, you can learn from them -- and avoid them. Here are three common investing mistakes to avoid making right now.
1. Removing your money from the stock market
2022 has been a rough year for many stocks. The major indexes -- such as the S&P 500, Nasdaq Composite, and Dow Jones -- have all experienced declines not seen since the beginning of the COVID-19 pandemic in March 2020. If you're looking at your portfolio and seeing it decline, it's easy to become a bit anxious and wonder whether you should be investing right now. The answer is yes -- especially if you have a while until retirement.
If time is on your side, pulling your money from the stock market is rarely a better option than weathering the storm and realizing that stock market corrections and downturns are inevitable. Great companies find ways to make it through and still be lucrative long-term investments. If anything, bear markets or corrections can be a chance to get some of your favorite investments at a better value.
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2. Not using a Roth IRA if you're eligible
If you're eligible to contribute to a Roth IRA, you should take advantage of it before investing in your regular brokerage account. Although it's a retirement account, Roth IRAs operate similarly to brokerage accounts because you can buy any stock you please. The major benefit of a Roth IRA is that your money grows tax-free, and you can take tax-free withdrawals in retirement. Depending on how much you accumulate, the difference between investing in a Roth IRA and a brokerage account could easily be thousands of dollars in capital gains taxes.
You can also withdraw your contributions, but not earnings, at any time without facing penalties or the usual 10% early withdrawal fee if you're under 59 1/2 years old. You should avoid it, but if you need to access some of the contributions to your Roth IRA, you can do so without any severe consequences. In tax year 2022, you can contribute $6,000 annually ($7,000 if you're 50 or older) into an IRA. Before investing in your brokerage account, contribute and invest that whole amount if you have the means.
3. Not using index funds for diversification
Diversification is one of the key pillars of investing, and it's even more important during times of high volatility. You never want the success or failure of your portfolio to depend too much on a specific company or industry. The harsh reality, though, is that many people don't want to put in the time or effort it takes to research various companies in different industries and make a bunch of different investments to achieve diversification -- and honestly, I don't blame them. It can be tedious work.
You should use index funds to help you achieve diversification in your portfolio. You can choose to keep it simple and invest in an S&P 500 index fund, which will cover large-cap stocks in any industry you can imagine. You can also invest in a few industry-specific funds to cover your bases, or you can even grab a few funds that offer a good mix of growth and stability. Whatever the case, using index funds will help you cover more ground in one investment.
