The stock market has been tumultuous over the past year, experiencing a stomach-turning series of ups and downs.
While the market has been on an upswing so far this year (giving many investors hope that the worst may be over), recession warning bells are still ringing. If we do face an economic downturn, stock prices could fall again.
Nobody knows whether a market crash is looming, but that doesn't mean you can't start preparing just in case. Regardless of what happens with the market, there are three important mistakes to avoid.
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Mistake No. 1: Trying to time the market
Timing the market involves buying and selling at just the right moment to make a profit.
In a perfect world, you would know exactly when the market reaches its bottom so that you can invest at the lowest possible prices. Then, when the market peaks, you can sell for the highest prices and make a profit.
In reality, though, nobody knows how the market will perform in the short term. If you're waiting for the perfect moment to buy or sell, you'll be waiting forever. Worse, if you're attempting to time the market and your timing is off, you could potentially lose a lot of money.
A safer alternative, then, is to keep a long-term outlook. The market may be rocky in the short term, but over the long run, it's always managed to earn positive average returns. If things take a turn for the worse, simply hold your investments and wait for the inevitable recovery.
Mistake No. 2: Panic-selling
If you're concerned about a potential market crash, it can be tempting to sell your investments now to avoid the worst of it. But again, timing the market successfully is nearly impossible, and you could lose more than you gain.
For example, say you sell your stocks now, expecting prices to fall. But there's always a chance the market could surge, and you'll have missed out on those earnings. Then you may decide to reinvest later, but if prices have increased since you sold, you'll end up paying more for your exact same stocks.
While it's not easy, the best thing you can do is try to ignore the market's short-term fluctuations. If the market drops in the coming weeks or months, your portfolio could lose value. But losing value isn't the same as losing money, and by holding your investments for the long term, your portfolio should rebound.
Mistake No. 3: Waiting too long to invest
Market downturns can actually be one of the best times to invest more, because prices are lower, and you can load up on quality stocks for a fraction of the cost. Then, when the market rebounds, you'll be in a fantastic position to take advantage of the next bull market.
However, if you want to earn as much as possible during the next upswing, it's best to invest sooner rather than later.
Nobody knows precisely when this downturn will give way to a bull market, and we likely won't even know we're in a bull market until stock prices have increased substantially. If you wait too long to invest, you may miss out on potentially lucrative returns.
Stock market volatility can be daunting, and if you're worried about a potential crash, you're not alone. But by choosing the right investments and holding them for the long term, you're far more likely to survive whatever the market throws at you.
