Investing in the stock market is a fantastic way to build wealth, grow savings and prepare for retirement. But to win as much as possible, it is important to have the right strategy.
How and where you choose to invest will largely depend on your personal preferences. Some investors prefer to buy individual stocks, for example, while others prefer index funds or exchange-traded funds (ETFs). No matter where you invest, however, there are a few common mistakes that could hurt your earning potential in 2022.
Mistake #1: Not investing in times of volatility
When the stock market is deteriorating, it can be tempting to take a break from investing until it recovers. However, sometimes it can do more harm than good in the long run.
Although it may seem counterintuitive, market downturns are among the best opportunities to buy more. Stock prices are lower, making it a smart way to load up on quality investments for a fraction of the cost. If you only buy when the market is booming, you are buying when stocks are most expensive. Over time, it could cost you more than you think.
While it can be daunting to invest during periods of volatility, keep in mind that the stock market has a long history of rebounding from lows. As long as you invest in the right places, chances are your portfolio will recover eventually.
Mistake #2: Withdrawing your money from the market
Along the same lines, taking your money out of the stock market completely can also be a costly mistake.
In theory, it makes sense to withdraw investments at the first sign of a downturn, then reinvest when prices fall. But timing the market effectively is nearly impossible, and you could potentially lose a lot of money.
The stock market is unpredictable, and even experts cannot predict exactly when a downturn or crash will occur. In many cases, stock prices will fall for a few days before rebounding quickly. If you sell everything and the market immediately spikes, you will have missed out on these potential gains.
On the other hand, if the market crashes and you wait too long to withdraw your savings, you could end up selling your investments for less than you paid, locking in your losses. So the best thing to do is to just hold your investments and wait for the market to recover.
Mistake #3: Buying short-term investments
The past year has seen the rise of meme stock, as investments like GameStop, AMC Entertainment, Dogecoinand shiba inus reached incredible heights.
It’s hard not to invest in short-term stocks that have seen phenomenal growth, especially when there are plenty of stories of investors who became millionaires overnight by investing in the right place at the right time. However, making a lot of money with these types of investments is extremely difficult.
Getting rich with short-term investments like meme stocks requires incredible luck. These stocks tend to rise when retail investors buy in droves to drive the price up, only to sell back soon after for a quick profit. If you buy or sell too late (even by just a few days), chances are the price has dropped and you end up losing money.
A much safer option is to focus on investments with long-term growth potential. These stocks won’t make you a millionaire overnight, but they are more likely to generate positive average returns over time. By choosing the right stocks for the long term, investing regularly (even in downturns), and keeping your money invested for the long term, you’ll be well on your way to generating wealth that could last a lifetime.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.