Question: What are the biggest mistakes I could make as an investor in this crazy economy?
Answer: Here are five of the biggest faux pas you can make today:
- Thinking that you need to do anything. A bear market is no reason to lose your own head. Ideally, you have already reviewed your portfolio with your advisor and determined your allocations. If that is the case, then there is no reason to do much until the situation changes.
- Trying to time the market, getting in and out on the lows and highs. These trading strategies fail more often than not, and rack up transaction costs. Maintaining a longer-term focus is more efficient and has a much better success rate.
- Assuming the past will repeat itself. Stocks roared back after the Great Financial Crisis of 2008 and Pandemic Crash of 2020. This time might be different. Today’s market is plagued by high inflation and rising interest rates that could impact stock valuations. As a result, the climb back to previous valuations could take several years.
- Believing the current trend will continue unchanged. This bear market will end when conditions change. That could happen tomorrow (unlikely but possible) or five years from now (also unlikely but possible). Odds are it will end somewhere in between. It will happen when investors gain the confidence that the broader issues have been resolved.
- Feeling like cash is burning a hole in your portfolio. Many investors look at cash as though it’s a negative, lead weights on your ankles. But cash is your friend in a bear market. It doesn’t force you to sell other assets when they are at a low. It also provides the dry powder to invest in opportunities that arise out of the chaos. Doesn’t cash lose a little bit every year to inflation? Yes, but the dollars it can make you by investing opportunistically are many times greater than the potential loss to inflation.