It's only natural to worry about money. We all do it, however much we might like to pretend we don't.
Yet, this natural impulse can work against you when it comes to investing. By asking, "Is it safe to invest right now?" you might forget to ask two questions that are even more important.
Here's what they are.
Image source: Getty Images.
Are you diversified?
At the top of the list for any investor should be the question, "Am I diversified?" Many investors have fallen on hard times specifically because they did not ask this simple question.
In short, a diversified portfolio consists of stocks spread across multiple industries and sectors. Some should be large; some should be small. Some should be focused on growth, others on value.
Say you have a five-stock portfolio containing Apple, Microsoft, Tesla, Starbucks, and Bank of America. That portfolio is overweight tech and underweight healthcare, materials, and energy. Perhaps swapping out Apple for Eli Lilly would make sense, or maybe replacing Microsoft with ExxonMobil would be a step in the right direction.
Better yet, increasing the overall number of stocks would spread your risk among more names, thus lowering the chance that a one-off event could wreck your portfolio. In addition, sprinkling in some foreign stocks, precious metals, bonds, and cryptocurrencies can add further diversification.
Are you trying to time the market?
The second question investors should be asking -- particularly right now -- is whether they are trying to time the market. I'm sure you've heard it before, but it's worth repeating: Timing the market doesn't work. Numerous studies show it's better to stay invested long term. Nevertheless, it's human nature to think we can beat the odds.
Staying disciplined means buying whether market sentiment is high or in the dumps. It means letting your winners run and still believing in your laggards (assuming their fundamentals and your investing thesis remain intact).
Here's a case in point as to why letting winners run is better than trying to time the market: $10,000 invested in Apple stock in January 2013 would have grown to $46,380 by February 2020. An investor who sold shares on that date -- almost perfectly anticipating the COVID pandemic stock market correction would have recorded a 364% total return.
AAPL Total Return Level data by YCharts.
However, if that same investor had held their shares through to today, the investment would have grown to $104,870 -- a total return of 949%. In short, holding through the volatility of the pandemic almost tripled the total return -- demonstrating that letting winners run can make a huge difference.
AAPL Total Return Level data by YCharts.
All in all, regardless of what concerning signs pop up in the broader economic landscape, investors should keep researching and investing in great companies. Over the long run, those investments will pay off despite any short-term volatility that may -- or may not -- occur.
