There's a lot of uncertainty right now, both in the stock market and the greater economy. Nobody truly knows what the rest of 2022 and 2023 have in store, but the best thing investors can do is to overprepare instead of remain underprepared.
As you're investing during these uncertain times, here are some critical mistakes you should avoid.
1. Investing without a proper savings fund
Investing is great for your future, but you want to avoid investing without having an emergency fund saved first. An emergency fund ensures you have fast access to cash if an unexpected expense pops up. This could be car repairs, major home maintenance, or a medical procedure. If you have to sell stocks to cover an expense, you could find yourself taking a loss on your initial investment or making a profit and owing capital gains taxes. Neither is ideal.
Traditionally, the rule was to have three to six months' worth of expenses saved. However, with today's economic environment -- high inflation and a potential recession -- it's better to aim for six months to a year's worth of expenses saved. If you're only responsible for yourself, you could be comfortable saving the lower end of that range. If you have a family and are responsible for others, you should probably aim for the upper end.
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2. Paying too much attention to short-term noise
It's easy to get caught up in the daily happenings of the stock market: the price changes, the earnings, the economic reports, and everything in between. There's nothing wrong with being informed; that's always a good thing for investors. It can, however, become a problem when you allow the short-term noise to cause you to begin trying to time the market.
Many investors will anticipate or hear certain news and think it should make stocks move a certain way and then invest solely because of that speculation. For example, some investors may anticipate a company beating earnings expectations and buy shares beforehand, anticipating they'll go up and they can make a quick flip. You may be right once or occasionally, but timing the market accurately is virtually impossible to do consistently over the long-term.
One of the best things investors can do is to incorporate dollar-cost averaging into their strategy. With dollar-cost averaging, you set an investing schedule and stick to it regardless of what's happening in the stock market. It could be every Friday, every other Wednesday, the first of every month, or whatever works best for you. What's important is sticking to the schedule no matter what the market does.
3. Not having dividend stocks in your portfolio
Dividend stocks should be part of every well-diversified portfolio. They're a great investment at any time, but they can be especially useful during down periods in the stock market, mainly because they reward investors for being patient.
Let's take Microsoft (MSFT -4.08%) and Amazon (AMZN -2.77%) as examples. Since the start of 2022, both companies are down over 28% and 42% year to date, respectively (as of Nov. 14). The major difference is that Microsoft shareholders have made $1.86 in dividends per share over that span. Amazon shareholders haven't received anything.
This doesn't inherently make Microsoft a better investment, but it does point to the benefit of owning dividend stocks. They allow you to ignore daily stock price movements. As long as the long-term results are there, it doesn't matter if a stock is up 20% one day, down 20% the next month, and then down again weeks later because you're steadily getting paid regardless.
Dividend Aristocrats -- companies that have increased their yearly dividend for at least 25 consecutive years -- can provide a sense of stability during these times of uncertainty because you know they've weathered bad economic storms before.
4. Only investing in individual companies
There are risks involved with any investment, but there are ways to minimize these risks, such as investing in well-diversified index funds. Well-diversified index funds, such as an S&P 500 index fund, may not have the rewards that come with a small portfolio of individual company stocks, but they also don't have the same risks because their success (or lack thereof) isn't too reliant on too few companies.
Exchange-traded funds (ETFs) like the Vanguard S&P 500 ETF (VOO -1.23%) and Schwab U.S. Broad Market ETF (SCHB -1.30%) include 503 and 2,500 companies, respectively, spanning every major sector. They are one of the easiest ways for investors to add diversification to their portfolios.
You never know how a single company will bounce back from a down period, but you can bet the stock market as a whole will find its way back in the long run. Focusing on the broad stock market and not individual companies is a great way to minimize risk and put yourself in a position to take advantage of an upturn in the market.
