3 investing mistakes to avoid during a stock market correction
Investors are getting hit with scary news and stock market volatility they haven't seen since the beginning of the COVID-19 Pandemic. There are a few significant and problematic topics in the news headlines ranging from Russia invading Ukraine, the ongoing global COVID pandemic, and inflation, to name a few. These negative headlines could lead you to make some costly investing mistakes.
If you are a day trader or speculate on the hottest stocks of the day, you should likely make major adjustments to your investment portfolio based on short-term news. On the other hand, if you invest for long-term goals like retirement or financial freedom, making significant adjustments to your financial plan based on daily news will greatly reduce the odds of reaching your various financial goals. Doing nothing may seem counterintuitive, but it is often the best course of action for those with a well-thought-out financial plan and diverse investment allocation.
Always waiting for the stock market to crash
If you had a crystal ball and knew what the stock market would do every day, timing the market would be easy. The reality is that no one can successfully time the stock market consistently over time. You just need to be right too often.
As I write this, the major stock market indices are flirting with entering a bear market (simply put, a 20% drop from their peaks). While a bear market is never fun, it is far from a crash wiping out the vast majority of the value of your portfolio. If you have been investing over the past few years, you likely have only lost some of the impressive gains you made during the recent stock market run-up.
Stock market correction and bear markets are a normal part of the stock market cycle and do not mean we are heading to the next great depression or repeating the financial crisis of 2008.
Thinking you need to change your portfolio drastically
If you have invested in a diversified portfolio, you have exposure to various asset classes and companies from around the world. As your situation changes and market conditions adjust, there is room to make minor adjustments to your investment choices. That does not mean you need to sell everything and start over every time you have a down month or quarter.
Even within an index fund, there may be underlying investments doing well while others are doing terribly. Even in years when the S&P 500 had above-average returns, there were often a number of stocks that either lagged the overall S&P 500 or even lost money. Those stocks can change from year to year. Often, stocks that underperform in the prior year will have more room to grow in the current year.
Pulling money from markets and waiting till the news turns positive
Warren Buffett famously said, "Be fearful when others are greedy, and greedy when others are fearful." If you wait until all the news headlines are positive, you will have likely missed months, or even years, of positive stock market returns.
When times get tough, you may be tempted to go to cash or stop contributing to your investment accounts until things calm down or the stock market has left a correction or bear market. I hate to sound terribly pessimistic, but there will always be a reason to be negative. Trying to time the stock market is a fool's journey to the poor house. You just can't do it, and if you are just buying investments with every paycheck or automatic contributions, you will continue to buy stock on sale and get the long-term benefits of compound interest.
The best general investing advice I can give is to set up automatic contributions to your investments, so you buy when times are good and bad. Have a diversified portfolio that is consistent with your financial needs and goals. Go about your day and enjoy your life. If it feels like too much for you to handle on your own, work with a financial professional who can help you develop a roadmap to your financial goals and, more importantly, help keep you on track for those important life goals.
This article was written by David Rae from Forbes and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to firstname.lastname@example.org.
This material is provided for general and educational purposes only; it is not intended to provide legal, tax or investment advice. All investments are subject to risk. Please consult an independent legal or financial advisor for specific advice about your individual situation.