Some of the factors that cause investments to swoon are beyond your control. But others can be the result of foolish mistakes.
Make sure to steer clear of the following financial foibles at all costs. By avoiding these errors, you can prevent a lot of financial heartache and improve the odds of growing your money.
Buying a stock simply because it's hot
Some stocks rise because they’re the new, cool investments to own. Others become meme stocks, which tend to rise more because of social media popularity than due to sound investment principles.
Investing in a stock simply due to its popularity is not a sound strategy. You easily can end up losing money if the stock’s fame fizzles out. Do some extra digging when researching a stock and look for things that genuinely make the stock a sound investment.
Not knowing why you're buying a stock
Some investors gravitate to stocks due to name recognition or buzz around the companies. For example, the FAANG stocks — which refer to American tech companies Facebook (now Meta), Amazon, Apple, Netflix, and Alphabet (known better as Google) — are household names.
But just like any other investments, these stocks see rises and declines. Before you invest in any stock — no matter how famous the company — do some extra research so you understand why you’re buying a stock instead of just blindly investing.
Investing in a stock rarely offers you a smooth ride up. Even a good company can have a bad earnings report, or fall victim to an overall decline in the U.S. economy. It can be scary to see your investments head south, and you may feel like you want to bail out as soon as possible.
But panic selling forces you to lock in losses, as it prevents you from making gains if the stock later recovers and starts rising again. So, keep a level head when it comes to selling off shares. Sell for the right reasons, not because of panic.
Holding too much cash
Even in a high-yield savings account, your cash typically isn’t making as much money as it could if you had it invested in stocks and bonds.
You might want to increase or decrease the amount of cash you have on hand depending on the status of the market. But it usually makes sense to at least consider investing a portion of your money in stocks and bonds at all times.
That is particularly true for long-term goals like building a retirement nest egg.
Trying to time the market
The performance of stocks can be volatile, and things won’t always turn out the way you expect. That is why trying to time the market is often a fool’s errand.
Instead, invest with a long-term horizon in mind. Investing in solid companies — or in a simple index fund — often pays off over the long run.
Not understanding your asset allocation
Typically, you cannot simply set up a financial portfolio and then walk away. You may want to change your investment mix based on market factors, or to shift your asset allocation as you get closer to retirement age.
If this task feels overwhelming, consider meeting with a financial advisor who can offer advice about how to select your assets to meet particular needs.
Investing money you will need soon
If you are going to need money soon, there are probably better options than putting that cash into the stock market. Because of the volatility of stocks, it is typically not wise to put cash you will need soon into the market.
Instead, consider a high-yield savings account or a checking account. CDs can be another good place to put money you will need within the next few years.
Loading up on your employer’s stock
Companies may include stock options as part of your employee benefits package. That can be a good thing. But think twice about placing too much of your money into your company’s stock. That might mean avoiding overloading on company stock in something like a 401(k) plan.
Instead, remember to diversify your portfolio, which will provide a measure of safety should your company’s fortunes head south.
Not setting goals
When was the last time you thought about your investment goals? Do you know exactly what you are trying to achieve, or do you just have a vague idea?
Sit down and ask yourself some questions about what you hope to accomplish with your portfolio. Will your portfolio fund a fun trip, home renovation, or another goal? Or is your investing geared toward saving for retirement?
Understanding your goals can help you steer investments in the right direction for what you are trying to achieve.
Don’t allow yourself to fall into traps that can hurt your portfolio. Avoiding some basic mistakes is a simple but smart way to grow your money.
By eliminating unforced errors, you improve the odds of investing success. With a little luck, you might even find yourself able to retire earlier than you expected.
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