Everyone wants to know when the stock market is going to
tank -- and how high it's going to go just before it does. It would make
getting rich a lot easier. Even Wall Street experts don't know exactly what's
ahead in the short run. But what they do know is how to position your
investments to make the most money over time. Here are the top 4 mistakes
investors are making at the moment -- and how to avoid them.
1. Not investing in
stocks: You have to be in it to win it, as the old lottery adage goes.
That's true of investing as well. Stocks offer the highest returns over many
years. The problem is a lot of people are scared of stocks after the dot com
bust and the financial crisis that led to the Great Recession.
Too many investors are sitting on the sidelines and keeping
their money in cash -- which earns them nothing. Meanwhile, the S&P
500 has gained about 180% since the stock market hit its low point in
March 2009. When prices are falling, it's easy to get skittish and avoid
putting money into the market. Still, the best time to build positions for the
long haul is when there are more bargains.
2. Investing in
riskier assets: The second pitfall is that investors are putting too much
money in long-term bonds and high-yield -- often called "junk" --
bonds. It's been dubbed the "search for higher yield". "High
yield" is Wall Street speak for "high risk." You get paid more
because there's a greater chance that you won't get paid at all if a company or
entity goes belly up.
At the moment, the junk bond market is so hot that investors
aren't even demanding much extra compensation for the risk they're taking on.
That could come back to bite them. Chris Philips, a senior strategist at
Vanguard, notes that money going into higher risk assets has been higher than
what's being invested in lower risk securities over the past 12 months.
3. Short-term
thinking: Another "no no" is that investors have short memories.
They tend to look at what did well last year -- or even last week -- and put
their money into that instead of thinking about the future. Consider that famed
investor Warren Buffett isn't a day trader. He buys companies with the
intention of holding them for awhile -- often years. Most investors are saving
for retirement, buying a house or other long-term goals. They should have a
similar mentality to Buffett.
4. Forgetting
inflation: The economy will eventually pick up more momentum and that will
lead to higher inflation. The Federal Reserve will have to raise rates as a
result. Rate hikes could come as soon as next year. Once the Fed starts raising
rates to keep inflation in check, many of the bonds that did well last year
won't look as good. Rising inflation will eat away at fixed-income returns.
Over time, stocks are the best protection against inflation.
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