If you're feeling jittery about the market these days, you're not alone.
Investors are facing high inflation, threats of a recession, rising interest rates, and now a banking crisis that keeps drip, drip, dripping. Last week, Deutsche Bank became the latest financial institution to spook investors when the price spiked on the credit default swaps found in the German bank's debt load, indicating the bank's risk of insolvency is rising.
While there is a risk of the market crashing again, no one knows what the future holds. If you're worried about another market pullback, here are three common mistakes you will want to avoid making yourself.
Image source: Getty Images.
Mistake 1: Forgetting to diversify your holdings
In an uncertain market, it's especially important to be diversified across multiple stock market sectors. In addition to the risks in the broad economy, each individual sector is subject to its own set of risks, and we've already seen a number of sectors under pressure.
Tech stocks, for example, crashed last year as rising interest rates forced investors to reassess valuations that seemed to have been based on never-ending zero interest rates. As a result, valuations fell sharply in the sector, especially for unprofitable tech stocks, including many software names.
Retailers and consumer brands struggled with elevated inventory levels over much of the past year as earlier supply chain issues led these companies to order additional items in anticipation of continued delays that didn't materialize. In the financial sector, the recent banking crisis has roiled bank stocks, and the energy sector is closely connected to oil prices, which tend to fall in recessions.
It's impossible to predict how individual sectors will perform, so diversifying your holdings across multiple sectors is the best way to ensure that your portfolio doesn't get crushed when one sector tanks.
Mistake 2: Selling all your stocks
Given the uncertainty in the stock market, it might seem like a smart move to sell all your stocks and wait for brighter days, but there's a problem with that strategy. You won't know for sure when the next bull market will start, and if you sell all of your stocks, you'll probably miss out on it, even if you intend to get back in before it starts.
The start of a new bull market can deliver phenomenal gains for investors, as momentum tends to build as investors regain confidence. For example, in 2009 the S&P 500 rallied 69% in the year after it bottomed on March 9, 2009. In the first month of that rally, the broad-market index jumped more than 20%.
That shows why you want to stay invested through the bear market.
While building a cash cushion isn't a bad idea, exiting the stock market entirely is likely to be a mistake.
Mistake 3: Not buying (great) stocks while they are on sale
Just as it's a bad idea to sell all your stocks in a bear market, it's also a mistake to stop buying stocks if you are at a stage of your life where you're still building your investments for retirement or another long-term goal. That's because bear markets are great buying opportunities for long-term investors and net buyers of stocks since stocks go on sale.
The fear in the market and the prospect of poor results in the short term keep some investors away and cause stock prices to fall, but long-term investors can ignore that noise. Warren Buffett's classic advice to be greedy when others are fearful sums up the reason you want to keep investing during a bear market.
Stocks are selling at a discount largely because of fear, but many of the underlying businesses are just as strong as they were a year or two ago, if not stronger, and their performance will improve when the economy does.
You can take advantage of that misalignment by continuing to buy stocks.
