Your goal as an investor is to make money — not lose it. But if you’re not careful, you could end up in the latter scenario, especially if you do the following.
1. Act irrationally
Stock market crashes happen all the time, but it’s how you react that can spare you from losses. One thing you must remember is that you don’t lose money in the market unless you sell investments for less than what you paid for them.
If you panic when stock values tumble and unload investments when they’re down, you’ll lock in losses. But if you sit tight and pledge to wait things out, there’s a good chance your portfolio will recover fully, thereby sparing you from losing so much as a dime.
2. Trade frequently
Buying and selling stocks often could really backfire on you. Not only might you lose money to commissions, but if you scoop up and unload stocks in an effort to time the market, you’re apt to get burned.
Studies have proven time and time again that timing the market just isn’t an effective way to grow wealth. A better bet? Employ a strategy like dollar-cost averaging, where you invest at timed intervals.
3. Bet on companies’ failures
A lot of people make money by shorting stocks. But unless you really know what you’re doing, you could end up losing money by betting that stock values will go down instead of up. Just look at the recent short squeeze that happened when GameStop exploded earlier in the year.
If you’re going to short a stock, you may want to find one that’s more under the radar. And also, make sure you truly understand the risks involved before moving forward.
4. Load up on penny stocks
Penny stocks appeal to investors because of their low price point. But penny stocks tend to be pretty speculative, and even though they’re not particularly expensive to buy, they can still cause you to lose money if their value sinks
A better approach? Choose well-established companies that trade publicly. That way, you know they’ll be held accountable for specific reporting requirements, and you can feel confident in their staying power.
If money is tight, you can look at buying fractional shares over penny stocks. That way, you’re not as limited as to which companies you can invest in. Though not every stock is available in fractional form, many are, and a growing number of brokerage houses are opening up that option.
You work hard to eke out money to invest, so the last thing you want to do is blow it. The above moves could prove disastrous to your quest to build wealth, so don’t fall victim to them.
Instead, train your brain to cope with stock market volatility, limit the extent to which you buy and sell stocks, avoid shorting stocks unless you’re really confident you can pull it off, and steer clear of so-called bargain stocks that may cost very little but aren’t great companies to own.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.