Investing in a diversified portfolio of stocks is key to saving enough for retirement, especially when so-called “safe” investments like bonds are providing a historically low rate of return. While stocks have historically provided high rates of return over long periods of time, they carry an inherent risk: You could lose your fortune if you make big mistakes.
Fortunately, avoiding unforced errors in investing is pretty easy with a little research. In fact, you can learn right here how to avoid three big investment mistakes that could ruin your portfolio’s performance and leave your retirement underfunded.
1. Investing in stocks with money you’ll need soon
The stock market is a great place to park your money — if you don’t need the cash right away. Any money that you’ll need within the next few years should be kept in an accessible savings account (if you’ll need it within a year or so) or put into a safe investment like a certificate of deposit. You should only invest in the stock market with money that you can leave alone in case of a downturn.
If your investments take a bit hit — like when the stock market plummeted 40% in the second half of 2008 — you’ll going to be in a lot of financial trouble if you need that money right away. While the market has since recovered since the 2008 crash, it took many years to reach and exceed its pre-crash levels, and some stocks never recovered in full or at all. If you can’t wait out the recovery process because you need to raise cash by selling stocks, you’ll be forced to absorb huge losses.
Stocks grow at a much higher rate than most other investments, but their average annual returns of about 10% have been achieved over the course of decades. There are years when the market drops and years when it soars, and you need to stay invested for years so that you can ride out the lows and profit from the highs, rather than being forced to sell when the market has reached a trough.
2. Taking stock advice from unreliable sources
Your brother-in-law, friend, or boss may promise to have a great stock tip, but chances are that tip is based on speculation or comes from a dubious source. It’s hard for even skilled investors to beat the stock market, so unless your friend or family member is working in…