As a general rule, investing in the stock market is a savvy way to grow your wealth. However, it’s important to understand how the stock market works and to have realistic expectations about its performance before you put any of your hard-earned money into it — otherwise, you can end up losing it all.
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Here are some costly, dangerous assumptions you should not make when investing in the stock market.
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It’s Possible To Time the Market
Some investors mistakenly believe they can “time the market,” knowing when to get out of the market and when to get back into the market. However, there are so many factors that affect market swings, so this is impossible to do with any accuracy.
“While it can be tempting to wait for the ‘right time’ to invest, several studies have found that investors that try to time the market tend to do much worse than a buy-and-hold investor who avoided market timing altogether,” said Alex Michalka, VP of investment research at Wealthfront.
“Buying low sounds great in theory, and it’s not surprising that so many investors think they should wait for the right moment to get into the market,” he continued. “But time in the market is one of the most powerful ways to increase your returns because of the way compounding works. When you wait to invest, you give up time in the market and your returns have less time to compound.”
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Popular Stocks Are Always Good Investments
You may be tempted to invest in a stock simply because it’s getting a lot of buzz, but this isn’t necessarily a sound strategy.
“One of the biggest assumptions people make when they start investing is that a stock must be a good investment if it’s on the news or being talked about on social media,” said Victor Wang, CEO of the investing platform Stockpile.
“While it doesn’t hurt to invest a little bit of your money in a popular stock if you believe in it, popular doesn’t always mean profitable,” he said. “Sometimes, stocks hyped up on social media can actually be overpriced, which can lead to you losing money in the long run.”
Before investing in any stock, do your own research.
“Whatever you decide, even if that’s buying a fractional share of that cool electric car or AI company, make sure to diversify,” Wang said. “That means investing in a bunch of different things across a variety of industries to reduce your risk. That way, if one industry takes a hit, the others might help keep your portfolio balanced.”
Stocks Will Always Go Up in Price
As a whole, the stock market tends to move in an upward direction over the long term. However, this doesn’t always hold true for individual stocks.
“People assume stocks always go up if you wait long enough,” said David Materazzi, CEO of Galileo FX, an automated trading platform. “That assumption gets people hurt. It creates a false sense of safety. A high price paid never forgets. You can sit in a bad investment for 10 years and come out behind. Inflation eats, opportunity cost piles up, and time, instead of helping you, becomes the enemy.”
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This article originally appeared on GOBankingRates.com: 3 Dangerous Assumptions You Should Not Make When Investing in the Stock Market
