3 major investing mistakes to avoid during a down market
Author: Maurie Backman
Source: The Motley Fool
It's no secret that 2022 has been a tough year from a stock market perspective. Stocks have spent many days over the past four months dipping into correction territory. And a lot of investors have portfolios with balances that are down substantially year to date.
At times like these, it's important to approach your investment decisions strategically. And that means steering clear of these all-too-common mistakes.
1. Selling off stocks in a panic
Whether this is the first down market you've experienced or your tenth, it's easy to let emotions get the better of you when stock values fall. But one thing you really don't want to do is unload stocks when they're down due to fear. If you go that route, you're guaranteed to lock in losses, whereas if you wait things out, there's a strong chance those stocks will recover in time.
As a general rule, it pays to take a "buy and hold" approach to investing that has you owning the same quality stocks for many years. If you adopt that mindset, you may be less likely to panic when stock values dip on a temporary basis.
2. Buying shares of a given company simply because they're down
Stock market downturns have an upside -- they allow investors to scoop up shares at a discount. But one thing you don't want to do is load up on shares of a given company simply because you have a chance to snag them at a lower cost.
A better bet? Compile a list of stocks you want to own for specific reasons, and go after those when the broad market takes a tumble. Otherwise, at the very least, see if the companies with beaten-down shares tie into your investing strategy.
Also, determine whether they have long-term growth potential. If they don't, then you may not end up getting a bargain -- you may end up with a losing stock you regret purchasing.
3. Not diversifying your holdings
If you have a wish list of stocks you're hoping to buy, pouncing when share prices fall could make sense. But one thing you don't want to do is load up on too many companies within the same market sector. Doing so could throw off the balance of your portfolio, thereby exposing you to more risk and the potential for losses.
In fact, a better approach to investing during a downturn may be to load up on broad market ETFs, or exchange-traded funds. If you go this route, you'll get instant diversification, and you won't have to spend as much time researching your investment choices.
Stock market downturns are more common than you think, and some are more short-lived than others. While stocks have generally been sluggish this year, things could turn around during the latter part of 2022.
Then again, things could get worse. We just don't know. But if you make every effort to avoid these mistakes, you'll set yourself up to better weather the storm and come out ahead in the long run.
This article was written by Maurie Backman from The Motley Fool and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to firstname.lastname@example.org.