The stock market was down last year, and so far, it’s looking like 2023 could be similarly volatile. Interest rates are still increasing, inflation isn’t going away, and neither has the possibility of a recession.
That all makes it hard to decide on the best way to manage your investments with your stock broker. Unfortunately, many investors, especially beginners, make serious mistakes that cost them a lot of money. Former financial advisor Humphrey Yang pointed these out in a video on how not to invest in 2023. To avoid sabotaging your portfolio, watch out for these five mistakes.
1. Panic selling
Panic selling is when you sell off 90% or more of your assets within a month. People normally do this during market volatility, because they see their portfolios take a hit and they’re afraid of losing more.
While it seems logical, this is the worst thing you can do. Even if your investments decrease in value, those losses are only on paper; you don’t actually lose money until you sell. If you hold on through volatility, your investments could and likely will go back up when the market recovers. By panic selling, you don’t give your portfolio a chance to bounce back.
To make it even worse, 30.9% of investors who panic sell never reinvest, according to an MIT study. Not only are these investors selling low, many also stay out of the market and miss out on potential gains.
2. Growth stocks
“Growth stocks” is a term for companies that are focused on expanding as quickly as possible, typically using the bulk of their capital to do that. Yang says you should be hesitant about investing in growth stocks in 2023 because of how these companies leverage debt and borrowing. Due to rising interest rates, companies will be less willing to take on debt, meaning growth could slow down significantly.
This doesn’t mean you need to avoid growth stocks entirely and purge them from your portfolio. Just be careful about which ones you invest in, and be prepared for more volatility than normal if you do.
3. Keeping your cash in a low-interest bank account
Even with money you haven’t invested, like your emergency fund, it’s still important to make sure you’re getting a reasonable return. And if you have a lot of cash in your checking account, or in a big bank paying an average APY, you’re definitely not getting as much as you could.
The best option for safely storing cash is a high-yield savings account, which is a type of account offered by online banks. Plenty of high-yield savings accounts currently offer APYs of 4% or higher, more than 10-times the national average. Unfortunately, many consumers don’t take advantage. In the third quarter of 2022, savers missed out on $42 billion in interest they could have earned had they used high-yield accounts, according to an analysis by TradeAlgo.
4. Copying your friends (or anyone else) without understanding the investment
Many people love sharing their investments. You may have friends and family members who tell you about the stock or cryptocurrency they expect to blow up. And then there’s social media, where every other financial influencer will tell you what you should invest in.
Never blindly copy someone else’s investment. There’s nothing wrong with getting ideas from other people, but make sure to research everything yourself first. The person talking up an investment could be omitting some key flaws. Even if it’s a good investment for them, you also need to consider if it fits your current financial situation and goals.
5. Timing the market
When stock prices are volatile, more people make the mistake of trying to time the market. This is just about impossible to do reliably, and even if you could, it’s not worth the effort.
Charles Schwab did a study to see if market timing works. It compared five hypothetical investors who received $2,000 on the first trading day of every year, from 2001 to 2020. Each investor had a unique investing style. Here were the styles and the final amounts each one accumulated:
- Perfect timing: This investor always put their money into the market at the lowest point of the year. Total: $151,391
- Invest immediately: This investor invested all their money on the first day of the year. Total: $135,471
- Dollar-cost averaging: This investor divided their money into 12 equal portions that they invested on the first trading day of every month. Total: $134,856
- Bad timing: This investor always put their money into the market at the highest point of the year. Total: $121,171
- Stay in cash: This investor kept their money in cash investments. Total: $44,438
As you can see, the worst option is not investing, which is what often happens when you wait around because you think prices could drop. Even though having perfect timing would help, no one does, and every other investing style also produced fantastic results. It proves the point that time in the market beats timing the market.
Yang’s advice on how not to invest includes several of the biggest mistakes investors make. If you avoid them with your own investments, your portfolio will be much better off.
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