Wouldn’t it be nice if you knew exactly when this current bull run was ending? Then you could sell off all your stocks and wait in cash, ready to buy things as they drop in price. That would be great, wouldn’t it?
That’s not how the stock market works though. This bull run might end tomorrow or it might go on for a few more years. There’s no point trying to guess though. What you should be doing is trying to avoid these top four mistakes that investors make.
1- Don’t stop buying stocks
It might be easy to buy stocks when the market is doing well. Everyone is telling you how well their stock is doing. All the analysts are saying great things about the market. This gives everyone confidence in the market.
However, some of the best time to buy stocks is actually in the middle (and end) of a bear market. It can be really hard to do that though. Nobody wants to buy a stock only to see it lose a large percentage of its value a few months down the line. What you should do then though is buy some more.
You might not be able to buy anymore though if you don’t have any cash, right? Well, then make sure you have some cash! You should have some cash stashed away in reserves anyway.
Really, the best thing you should be doing is systematically buying good stocks both on the way up, and on the way down. That way you won’t ever have to think about when to invest, but instead just where to invest. Don’t get scared when the market tanks! If you have the guts to do it then you should be more aggressive during this time.
2- Don’t sell scared
You have to remember that you’re investing for the long run. Investing is not for next week, but more for the next decade or the decade after that. Remember that and it should help you when you feel scared and ready to sell.
When the market is tanking it can be hard to sit there and watch your portfolio value dwindle down. Here’s the thing though, if you get scared and start to feel like you need to sell then more than likely it’s already too late to do so. You never want to sell on emotions. You might be selling at the absolute worst time.
Instead of selling scared you should be buying with confidence. Just remember that all runs will eventually end and go the other way. Just focus on picking good stocks and you’ll be fine. Don’t try to time the market.
3- Don’t put too much money in one place
Smart investors don’t put all their eggs in one basket and you shouldn’t either. Just because you love a stock doesn’t mean that you should invest more into it. If you want to put more into it though you can, but you should have a plan to diversify your entire investment portfolio so that it’s balanced.
Balancing your portfolio correctly will depend on where you are in life and how much you can handle risk. If you’re ok with more risk then put more into stocks vs bonds. If you’re in your 30s then put more into stocks because you have more time to weather the storms. If you’re 75 years old you need to tone down the stocks and exchange them for something less risky like bonds.
Whatever you decide to do you should diversify. Even if you want to be aggressive with your money and put everything in stocks you should at least spread your money around in a few different stocks. Don’t just pick one and pray. That is definitely not a smart strategy.
4- Don’t let your portfolio become unbalanced
Hopefully you have your assets diversified and you’re good about adding to your investments on a regular basis. Over time your portfolio will grow. As it grows some stocks will do better than others. Some assets will do great while others lag. What you need to do is rebalance your portfolio so that you aren’t keeping all your eggs in one basket.
This section is kind of an extension of the previous one. You don’t want to have too much money in one place. Sometimes that means you have to sell some of the winners and buy into some of the losers. This might seem counterintuitive, but it works. So long as you’re investing in good assets and you’ve done your homework.
This is kind of like a way that you’re forced to sell at a high point with the winners, and then you’re forced to reinvest that money into the losers which are at a lower point. You’re buying low and selling high. Of Course, you’re not trying to time it perfectly. Instead you’re doing it systematically every year. This strips you from making the mistake of trying to time the market. Instead you can focus on where to invest that money, not when.