If there's one word that tends to be associated with the stock market, it's volatility. Just look at the past six months, where the Dow took us on a series of roller coaster rides that left even seasoned investors scratching their heads.
But despite the stock market's erratic nature, it's still the best place for your long-term investment dollars, especially if you're saving for a major goal like retirement. And while you don't have to be an experienced investor to do well with stocks, you should also know what mistakes to avoid that could destroy you financially. In fact, make sure not to do the following -- or you could see your savings disappear before your eyes.
1. Check your portfolio every day
These days, it's almost too easy to keep tabs on your investments. Most of the time, it's a simple matter of logging on to your brokerage account and seeing how those numbers look on the screen. And while it's a good idea to review your portfolio quarterly to make sure it's doing reasonably well, a good way to lose money in the stock market -- and torture yourself simultaneously -- is to check up on your investments every single day.
One thing you must keep in mind about the stock market is that rapid upticks and downturns are par for the course. Just as you might see your portfolio value climb $2,000 overnight, so too might it lose double that amount in a mere 24-hour period. But if you obsess over your investments' value, you're more like to react when the market takes a dip and sell investments off at a loss.
Remember, until you actually unload investments, when you see their value go down as a result of market activity, you're only looking at a loss on paper -- or, in most cases these days, a loss on the screen. In reality, you won't lose a dime until you actively go out and sell off investments for less than what you paid for them. So do yourself a favor and don't access your account every day, especially if you want to avoid taking needless losses. If you leave your investments alone for a substantial period of time, you're likely to come out ahead in the long run. Such has historically been the case for the stock market, and there's no reason to assume that you'll be the glaring exception.
2. Invest without doing your research
Many of us have been in this situation before: You have a friend or neighbor mention a killer investment that's worked wonders for his or her portfolio, and you rush to get a piece of that action thinking you'll have the same good fortune. Big mistake. These overnight investment successes are often short-lived, and if you get in at the wrong time, you could end up losing a large chunk of money.
A better bet, therefore, is to thoroughly research investments before diving in. If you're new to the stock market, this beginner guide will help you get started, and from there, it's a matter of digging into individual investments, seeing where their value lies, and determining whether they're likely to pay off in the long run.
3. Don't diversify
Imagine you heavily research a single industry -- say, biotech -- and decide to put the bulk of your money into that sector alone. At first, this might seem like a reasonable strategy -- invest in what you know. But there's a danger to putting all of your eggs in a single basket, and it's that if the industry you land on takes a major hit across the board, you stand to take some serious losses.
That's why it's so important to diversify when investing in stocks. The more areas of the market you get a piece of, the less likely you are to take a catastrophic hit when a single segment hits a rough patch. Another good way to diversify is to load up on index funds, which track existing indexes like the S&P 500, thereby giving you a broader piece of the market, all neatly packaged up.
The stock market can be a scary place to put your money, but it doesn't have to be. Avoid these mistakes, and with any luck, you'll benefit from the long-term growth so many investors before you have enjoyed.