Recession fears are on a lot of people’s minds right now, and some people have already seen their portfolios lose value. It can be scary, especially since you can’t control what the economy does. But you can control how you invest. Avoiding these four devastating mistakes may not prevent all losses. However, it may help ease your worries a little.
1. Not diversifying
Diversifying your investments can help minimize your losses by ensuring no single stock weighs too heavily on your portfolio. Try to spread your money between at least 25 different stocks in several sectors so that if a single company or market sector is hit hard, you’ll have other investments that are hopefully doing well.
Investing in an index fund is an easy way to diversify your savings with a single purchase, and it’s usually pretty affordable, too. Some of the best S&P 500 index funds, for example, charge around $3 per year for every $10,000 you have invested in the fund.
When you purchase one of these, you get an ownership stake in all the companies that make up the market index the fund is based on. And over time, the fund’s performance should be pretty close to the performance of the index itself. That doesn’t mean you can’t lose money investing in an index fund, but over the long term, they typically deliver strong returns.
2. Investing too conservatively
Investing conservatively may help you feel more secure, especially when staring down a possible recession. But it is possible to invest too conservatively. If you limit your exposure to stocks too much, you might see less volatility in your portfolio, but you could also miss out on bigger gains when stocks do well again. As a result, you’ll have to save even more of your own money going forward to meet your long-term financial goals.
Now is a great time to look over your portfolio and ensure that your investments match your risk tolerance. You may even want to invest a little more conservatively than you have been if you’re worried about losses. But you have to be willing to adapt over time as market conditions change.
If you feel you’ve adequately diversified and you don’t plan to use your savings anytime soon, you might consider just leaving your investments as they are. You could lose money in the short term, but hopefully, your portfolio will have recovered by the time you need to access your money.
3. Trying to time the market
Trying to time the market is never a good idea because it’s likely to go wrong. Trying to buy when you think prices are at their lowest or sell when they’re at their highest is something that even the most experienced investors don’t attempt because no one can predict the daily market fluctuations.
Stay focused on the long term. Look for companies at the forefront of their industries and large and stable enough to survive challenging economic times. And if watching the ups and downs of your portfolio is stressing you out, try limiting how often you check it.
4. Investing your emergency fund or short-term savings
You should only invest money you don’t expect to use for at least five years. Keep your emergency fund and money you’re saving for short-term goals in a savings account, where you can access them easily.
Investing your short-term savings is dangerous, especially when you’re looking at a possible recession, because there’s a chance that you could be forced to sell at a loss if you need to take your money out at a certain time. Even when times are good, you don’t want to take this risk with your savings.
There isn’t much we can do about the stock market other than wait and watch, but if you take the steps discussed above, you can definitely reduce your risk of loss a little. Beyond that, you just have to remember to take things one day at a time and focus on the long term.
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