Investing money you aren’t using immediately can be an excellent means of growing wealth. But one thing you don’t want to do as an investor is fall victim to these common traps.
1. Trying to time the market
If you manage to magically scoop up shares of a given stock when they’re trading at their lowest point, you might enjoy massive gains if you then manage to sell those shares at a high. But while buying low and selling high might sound like an easy thing to do, it’s actually not so simple.
If you keep waiting for a given stock’s share price to fall, you might miss out on an opportunity to buy it at a good price — even if it’s not the best price. That’s why a better approach to take is dollar-cost averaging. With this strategy, you commit to a preset investing schedule ahead of time and stick to it, no matter what market conditions look like.
If you follow this strategy, you’re likely to land in a situation where you sometimes pay more for shares of a given stock and sometimes pay less. But over time, you’re likely to end up with a lower cost per share than if you were to try timing the market.
2. Not diversifying your portfolio
There may be a certain sector of the market you know a lot about, like tech stocks. And you may have high hopes for that particular sector. But tempting as it may be to load your portfolio with stocks from a single market sector, doing so could mean limiting your opportunity to grow wealth and setting yourself up for major losses during periods of stock market volatility.
A better bet? Aim to maintain a mix of stocks across different market sectors. And if you don’t want to do that legwork, take the easy way out by investing in broad market ETFs, or exchange-traded funds. ETFs take the research and guesswork out of investing, and they’re an easy way to diversify without stress.
3. Investing in businesses you don’t understand
Some businesses may get more press than others. But if you don’t understand how those businesses work, you shouldn’t put your money into them.
As a general rule, you should only invest in companies whose business models and finances make sense to you. But it’s not just individual businesses you need to be careful with. You may want to stay away from broader investing opportunities if you just don’t understand them.
Take cryptocurrency, for example. Even though it’s been around for a while, a lot of people still really don’t understand it. And if that’s your situation, you shouldn’t put money into it. Instead, you should choose an investment whose risks and upside you have a better handle on.
It’s a great thing to invest your money — but you’ll want to do so carefully. These mistakes could really derail you on the road to growing wealth, so do your best to steer clear of them at all costs.