Over the last few weeks, millions of Americans have watched their investment portfolios hemorrhage money as the COVID-19 pandemic continues to disrupt life across the globe. It's likely to take several weeks or months to staunch the bleeding, and months more to see shares rise to their pre-COVID-19 levels. What does that mean for investors?
It means you need to be careful about the choices you make right now. The wrong decisions could turn these short-term losses into long-term disasters that you may never recover from. Here are three things you need to avoid during this pandemic.
1. Panic selling
When some people realize their investments are losing money, their first instinct is to sell off what they have left to preserve their remaining dollars and prevent them from losing any more. The flaw in this logic is the assumption that these investments are never going to recover. In the current situation, it is probably going to take a long time for many investments to bounce back, and there likely will be some businesses that never recover and end up closing due to the extended lack of income.
But large companies that have been around for decades and have historically performed well will probably weather the storm. Selling off these investments will just cost you money. Now is the time for patience. Have faith that most of your investments will likely bounce back once the crisis is over.
2. Betting on the wrong stocks
The risk takers among us may see the current situation as an opportunity to make a lot of money quickly by investing in companies that are doing well because of the COVID-19 outbreak. But this is more akin to gambling than actual investing. Many of the companies that are performing especially well right now are doing so because of unprecedented demand that will likely drop off after the pandemic passes. Trying to time the market by guessing when these stocks are at their peak could prove costly if you're wrong.
Investing heavily right now could also tie up a lot of your cash, which may be the wrong decision if you've lost your income due to COVID-19. In that case, you want to keep your money liquid so that it's shielded from the volatility of the stock market and available to you if you need it to help cover your essential expenses, like food, housing, utilities, and insurance.
If you are going to invest right now, focus on large, stable companies that have proved their ability to weather other financial crises in the past. Limit yourself to investing cash you don't expect to need in the coming months. If you don't have an emergency fund, your money should go here first.
3. Paying too much attention to short-term performance
It's probably best not to check your investment portfolio every day if you know you're prone to making emotional investing decisions. Your portfolio is going to have a lot of ups and downs over the coming months, but these short-term changes don't matter that much if you're not planning to withdraw your money anytime soon. Just like all the companies you have your money invested in, you just have to ride out the current storm.
It's never a good feeling to lose money, especially when so many people are also losing their jobs and the world economy is heading for recession. But making rash decisions about your investments right now could just make your financial situation worse. Avoid these mistakes and trust that, just as it has so many times before, the stock market will recover eventually.