There's a reason investors -- younger ones in particular -- are advised to put their money into stocks. Though the stock market comes with some risk, it also offers an opportunity to not only growth your wealth, but outpace inflation, which is crucial when it comes to retirement savings. That said, if you're not careful, you could end up losing loads of money in the stock market, and putting your nest egg at risk in the process. Here are a few ways you might accomplish that not-so-desirable feat.
1. Attempt to time the market
Some people research the stock market in an effort to invest at just the right time. Now let's be clear: There's nothing wrong with doing some legwork before making an investment. Quite the contrary -- that's the smart thing to do, whether you're an investing newbie or have been at it for years. But if your goal is to magically time the market, you're unlikely to succeed. Even the most seasoned investors struggle to predict when the market will rise and fall, so rather than spin your wheels in an effort to get your timing just right, focus on investing in solid, reliable companies and holding those stocks for the long haul.
Another approach you might take is something known as dollar-cost averaging. Rather than stick a large chunk of cash into the stock market at a single point in time, with dollar-cost averaging, you commit to investing a fixed amount over time, regardless of how the market happens to be performing. With this approach, you're focusing on accumulating assets rather than timing the market, and what generally happens is that you end up buying more stocks when prices are low and fewer stocks when prices are high -- which is what you want.
Of course, this approach only works if you're investing on a long-term basis. But if your goal is to accumulate wealth for retirement, for instance, it's a good tactic to employ.
2. React to market downturns
On Feb 5, 2018, the Dow took a historic tumble to the tune of 1,175 points. Then, in late February into early March, it lost 1,100 points over a three-day span. Any investor who panicked during those drops and sold off investments would've no doubt lost some money. So who came out unharmed? Those who kept their cool and left their portfolios intact.
It's natural to react to unfavorable market conditions, because nobody wants to face the prospect of losing money. But one thing you must realize is that when the market nosedives, you don't actually lose any money if you don't sell anything. It's that simple.
Here's another thing you should know. Stock market corrections -- periods where the market drops 10% or more -- are extremely common. So are recoveries. In fact, the stock market has historically rallied more so than it's faced downturns. Despite the stock market's inherent volatility, it's actually somewhat predictable. There will be highs and there will be lows, but if history tells us anything, it's that we'll experience more of the former over time than the latter – which means that selling the moment things get bad is a good way to come out a loser.
3. Invest in businesses you don't understand
It's hard to determine whether a company's stock is a solid buy if you have no clue how that business operates or makes money. That's why investing in businesses you don't understand is a bad idea. Sure, maybe your friends are buzzing about the latest biotech stocks, but if those companies baffle the heck out of you, you shouldn't add them to your portfolio. Rather, choose companies whose products and income streams make sense to you.
Remember, too, that you don't need to invest in individual stocks to get a piece of the stock market action. If you're having a hard time understanding or evaluating individual business models, go broader. Load up on index funds, which offer instant diversification and are great for folks who really don't know much about researching investments.
The nice thing about the stock market is that it's truly accessible to everybody, and you don't need to be an investing genius to profit from it. You do, however, need to avoid the above mistakes. Otherwise, you'll risk losing money rather than accumulating it.
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