Historically, investing has proven to be one of the best ways to grow your wealth over time, and this is especially true when it comes to the stock market.
The S&P 500 index has delivered an average annual return of about 10% since its inception in 1928. For example, if you invested $10,000 in the S&P 500 in May 2014, with dividends reinvested, you would have about $32,000 today.
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Investing can be fun and profitable. But there are some common investment pitfalls that can seriously damage your wealth if you’re not careful. Here are the five most common mistakes that can destroy your profits.
Market timing
Even for investment professionals, it is very difficult to time the market consistently. In volatile and uncertain times, you may choose to temporarily move your money sideways. However, this method can cause you to miss out on some of the market’s biggest gains. Instead of trying to time the market, staying invested and using strategies such as dollar-cost averaging can lead to greater gains in the long run.
Jump on the bandwagon amid a speculative stock mania
Most people pick stocks based on recommendations from family and friends, follow trends from media buzz, or invest in big brands they are already familiar with. But the reality is, if you try to invest in a small number of volatile stocks in hopes of big gains, you’ll probably lose everything. In 2021’s “meme stock” boom, the stock prices of companies like GameStop (GME) and AMC Entertainment (AMC) soared to all-time highs due to social media hype, and many suffered big losses when the bubble burst.
read more: Wealthy young Americans are losing faith in the stock market and betting on these assets instead. Get in now for a strong long-term tailwind.
Emotional investment
Investing is often driven by emotions. Although it’s hard to ignore the news headlines or stop obsessively checking your account, it’s important to focus on long-term returns and goals while investing. Investing based on human impulses and emotions will not yield optimal results. Unless your portfolio is well diversified and you’re not trying to time the market, there’s no need to fear volatility.
Do not reinvest dividends
If a stock or fund you own pays a consistent dividend, monthly, quarterly, or annually, it’s important to reinvest that cash to buy more shares of that company, allowing you to compound your future earnings. Most brokerage accounts have an option to do just that automatically, called a Dividend Reinvestment Plan (DRIP). The benefit of a DRIP is that you don’t pay commissions or brokerage fees, and you can often buy at a discount in the form of fractional shares, allowing you to exponentially grow your wealth.
Don’t invest in index funds and forget about diversification
Investing in index funds is essential for gaining diversified market exposure. Low-cost index funds such as iShares Core S&P 500 ETF (IVV) and Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) are a relatively safe way to grow your wealth in the stock market and are recommended by billionaire Warren Buffett. The advantage of index funds is that they typically have very low fees, less than 0.1%. Diversifying your investments with index funds can reduce your risk during periods of market volatility and economic downturns.
Remember, experts recommend not having any one asset that accounts for more than 5% of your portfolio. Make sure your portfolio is always diversified and regularly rebalanced.
If you’re new to investing, don’t let your emotions (or lack of experience) get the better of you. It’s important to always remember that investing involves risk. But with knowledge, you can reduce risk and increase your chances of big gains. Consider these five tips and tricks to get you on the right path to long-term financial success:
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This article is for informational purposes only, should not be construed as advice, and is provided without warranty of any kind.
