When I read that only 54% of the U.S. population owns stocks, I was pretty much shocked. Though countless Americans fear the stock market, it's hard to argue that it's had a pretty good run, especially in recent months.
But that's not the argument I'd make for buying stocks. Rather, my argument is this: The stock market has a strong history of delivering solid returns over time, and if you're smart about investing, there's a very good chance you'll come out ahead. On the other hand, if you act hastily and make poor investment decisions, you'll increase your chances of hemorrhaging money. Here are just a few ways you might come out a loser by playing the stock market all wrong.
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1. Unloading investments the minute things go wrong
When you hear that stock prices are falling, it's natural to want to log into your brokerage account and cash out your investments before their value declines further. Similarly, when a company releases poor earnings or gets bad press, you may be inclined to dump its stock and cut your losses before things get worse. But it's this exact sort of behavior that can lead to stock market losses.
If there's one thing you should know about the stock market, it's that despite its long history of volatility, it's thus far managed to recover from whatever tumbles it faced along the way. Case in point: Between 1965 and 2015, the S&P 500 underwent 27 distinct corrections where it dropped 10% or more in value, yet it ultimately recovered from every one. Had you been an investor during one of those corrections and sold off your positions immediately, you probably would've wound up losing money. But now think about all of those investors who sat tight and rode out those waves. Given the market's recent performance, they're probably sitting pretty.
The one thing you need to remember when stock values fall is that until you actually sell your investments, you're only looking at a loss on paper. If you hold steady and ride out the storm, your portfolio is likely to recover -- and then some.
2. Chasing bogus stock tips
There's a reason we've all heard stories about people who magically managed to buy the right stock at the right time and wound up millionaires. It's the same reason so many folks keep playing the lottery -- we want to believe that this sort of thing could happen to us, too. But in reality, these stories are mostly constructed of lies and myths -- as are the so-called hot stock tips you might pick up from a chatty neighbor or know-it-all coworker along the way.
It's much easier to follow a stock recommendation than to go out, sink time into research, and find your own investments. But unless the person supplying that tip is a proven investment genius with absolutely nothing to gain by getting you to buy in, you're better off taking your investment dollars elsewhere. Even if that tip-provider has the best of intentions, following that sort of advice blindly is a good way to end up with a sizable loss on your hands.
3. Not diversifying
Maybe you're interested in healthcare stocks, or think you know a lot about the energy sector. One piece of basic investing advice I always like to share is "buy what you know." That said, there comes a point when too much of a single investment type is a bad thing, so if your portfolio is comprised of, say, 80% biotech stocks, you're probably exposing yourself to undue risk.
A better bet? Invest in a wide range of companies and industries so that if a single sector takes a dive, you're not left with a whopping series of losses on your hands. Furthermore, don't just buy individual stocks whose performance is tied to that of the companies issuing them. Rather, diversify your holdings with exchange-traded funds, or ETFs, which are low-cost funds that simply track existing market indexes. ETFs are a particularly good choice if you're an investing newbie and aren't really sure how to choose the right stocks in the first place.
Contrary to what you may have heard, doing well in the stock market isn't just a matter of getting your timing right and choosing the hottest companies out there. Rather, it often boils down to being patient and taking a long-term approach to investing. If you avoid the above mistakes, you stand a better chance at coming out ahead financially -- even if it does take some time to reap the benefits of your smart choices.
