Last year, a bear market, rising inflation, and recession fears dominated talks about the stock market and economy. For experienced investors, the flip from bull to bear market was another chapter in the stock market's volatility playbook. For new investors, I'm sure it was a humbling experience.
This year has been different, with all three major indexes -- the S&P 500, Nasdaq Composite, and Dow Jones -- up year to date (as of June 28). Despite the recent rally in the stock market shifting investors' sentiments on the outlook for the year, there's one mistake I know I won't be making this time around: rushing to put money into the market.
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There are downsides to rushing to invest during rallies
Investing in the stock market is a marathon, not a sprint. The best investors are typically people who have an end goal in mind and practice patience and discipline. If you're like many investors, the key is discipline. It's easy to get caught up in the hype surrounding market rallies and rush to invest. The problem, unfortunately, is that it can cause you to ignore conventional investing wisdom or invest without doing the necessary due diligence.
That's what happened to a lot of investors in the bull market that followed the beginning of the COVID-19 pandemic, myself included. When the stock market was seemingly printing money, many investors felt they needed to hurry and put money into the stock market to prevent missing out on gains.
It might've worked short term, but time showed it wasn't sustainable, as many stocks (especially growth stocks) plummeted through 2022, back to pre-pandemic levels. That's the first problem with rushing into investments: It can lead to buying stocks at inflated prices, increasing the risk of losses if the market corrects or enters a bear market.
The other problem is that it can lead to bad portfolio diversification, as investors rush into the "hot" industries or stocks of the moment, leaving them overly exposed to certain market risks. For example, piling into pandemic tech darlings like Peloton Interactive and Zoom Video Communications without considering how the businesses would fair when things returned to something closer to pre-pandemic normalcy. Or piling into oil stocks last year because of rising gas prices.
Understand when you may just be suffering from FOMO
The fear of missing out (FOMO) is a powerful force in general, but especially in investing. It's far too easy for FOMO to cause someone to make irrational investments when they see others making money in a market rally. Unfortunately, this usually leads to someone trying to time the market -- which is challenging, if not impossible, to do consistently over time.
Stock prices are influenced by countless factors, many of which are unpredictable. Earnings, geopolitics, speculation, and even investor sentiment can all cause the market to move in unexpected ways. Trying to predict these moves is a lost cause that even professional investors on Wall Street have yet to master.
Sometimes it's best to just ask yourself, "Am I making this investment because I feel like I'm missing out?" If you have to think too much about the answer, there's a good chance you are.
One way to help prevent yourself from timing the market is using dollar-cost averaging, which involves making set investments on a set schedule. First, decide how much you can afford to invest, then decide what frequency makes the most sense for you. For instance, you could decide to break up $1,000 monthly investments into four $250 investments that you invest every Monday.
By putting yourself on a set schedule, you eliminate the guesswork and the urge to invest based on FOMO.
