You've heard the news: The stock market this year is down, and in a big way. These are the times when investing mistakes can be especially costly.
A quick review of four common investing mistakes can help you move through this tough market with minimal damage. Let's dive in so you can start tightening up your investment strategy today.
1. Hiding out in cash
Since January, the benchmark S&P 500 index is down 20%. Broadly, this means more investors are selling stocks versus buying. You might be inclined to do the same, hiding out in cash deposits until stocks return to growth.
Unfortunately, moving out of the market right now isn't a profitable strategy. People do it, often because it's easier emotionally. But unless you can predict when the markets will turn around, this strategy sets you up for lower returns.
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Here's what happens. Sell today and you'll get about 20% less value than you would have at the end of 2021. You then wait until you know the market has recovered. How do you know when the time is right? Stock prices start rising again. But then you'll pay more to rebuild your portfolio.
If you stayed invested, on the other hand, you keep your portfolio intact. No worrying about when to reinvest and no value loss on the liquidation.
2. Marrying your expectations
Novice investors often have expectations around the timing of growth. You might expect your investments to appreciate 10% a year, for example, or 50% in five years. The more attached you are to those expectations, the more panic sets in when results fall short. And panic can drive you into regrettable decisions.
Avoid any attachment to this year's results or next year's. You can project your portfolio's growth trajectory over 10 years or more. Shorter durations are likely to depart from your plan, sometimes significantly. Be prepared for that.
The stock market isn't predictable, and you often must roll with the punches.
3. Holding too few stocks
You can sometimes get away with not diversifying in a growing market. In markets like this one, though, lack of diversification can burn you. If most of your wealth is tied up in one company that's hit hard by inflation, your portfolio value will drop like a rock.
If you hold individual stocks, have at least 25 positions across different economic sectors. Alternatively, invest in low-fee exchange-traded funds (ETFs). An S&P 500 fund, for example, spreads your exposure across 500 companies.
4. Following the masses
Billionaire investor Warren Buffett once said his goal was to be fearful when others are greedy and greedy when others are fearful. He has created vast amounts of wealth by going against the masses.
The contrarian strategy makes sense. Buy when others are selling, and you take advantage of lower share prices. Sell when others are buying, and you benefit from high share prices. That boils down to buying low and selling high: the basic formula for making profits.
Following the masses can create the opposite result. You end up buying high and selling low. And that's not the way to make money.
Diversify and do nothing
If you are diversified, the simplest way to sidestep common investing mistakes right now is to do nothing at all. Don't sell off stocks that haven't fundamentally deteriorated. Don't get attached to expected results. And don't make trading decisions based on what everyone else is doing.
Instead, sit tight. Let this tough market run its course. Keep your portfolio intact so you're positioned to reap the rewards of recovery gains later.
