Investing mistakes to avoid in 2023
Navigating a way through the minefield of the modern US economy is getting tougher for investors, or at least, it was in 2022, as inflation, fiscal tightening and the threat of recession combined to create a volatile and treacherous investment landscape.
One piece of advice that stands every year is to make sure you have a handle on essential economic concepts. If you find yourself wondering how GDP is calculated or what is deflation, it doesn’t hurt to brush up on the basics so that you aren’t caught out by the rapid changes that have characterized the US economy over the last two years.
When it comes to investing in 2023, there are opportunities out there but you will also come across some pitfalls. Here are four investment mistakes to avoid in the year ahead.
Not having an adequate savings fund
Investments are great for securing your future but you should avoid making any without first setting aside money to cover unexpected expenses. If an unforeseen expense arises, having an emergency fund guarantees you'll have quick access to money, whether for costly home repairs, auto repairs or medical procedures. If you have to sell stocks to pay for these, you can lose money on your original investment or end up paying capital gains taxes. Neither are ideal.
In the past, it was considered sensible to have up to six months' expenses set aside. It's best to strive for six months to a year's worth of costs saved, though, given the current economic climate, which includes high inflation and a possible recession. And if you are responsible for others in your family, then that figure should be higher.
Taking a short-term approach
It's tempting to become engrossed in the day-to-day activities of the stock market, including price fluctuations, earnings announcements and economic news. Being informed is always a positive thing for investors, however, it may become a problem if you start trying to time the market as a result of the short-term noise.
Many investors will make investments simply based on their supposition when they expect or hear certain news that they believe should cause equities to move in a particular direction. For instance, some investors could acquire shares in advance of a business beating profits projections, in the hopes that the price will rise and they can sell them quickly. You might be right once or even occasionally, but timing the market correctly is extremely difficult.
Dollar-cost averaging is one of the best things that investors can do for their portfolios. You can set an investing timetable with dollar-cost averaging and stick to it no matter what the state of the stock market is, providing crucial stability at a time of volatility.
Overlooking dividend stocks
Every portfolio with a wide range of investments should include dividend stocks. They're a fantastic opportunity for investment at any time, but they can be particularly helpful when the stock market is down, partly because they reward patient investors.
Take Microsoft and Amazon. Both businesses have experienced significant losses up to November this year. Yet despite this, Microsoft shareholders have received $1.86 in dividends per share, while Amazon shareholders have received nothing. This does not mean that Microsoft is automatically a superior investment as a result of this, but it does highlight the advantage of dividend stock ownership. Stocks like these enable you to steer a course through the year without worrying too much about daily changes in stock price, which is a welcome source of reassurance and solidity.
Investing solely in individual companies
Any investment carries some risk, but there are ways to reduce it, such as buying into well-diversified index funds. A small portfolio of individual firm stocks may offer bigger potential returns than well-diversified index funds, such as an S&P 500 index fund, but they also carry more potential hazards, as the portfolio relies on the success of a small number of businesses.
Exchange-traded funds usually include hundreds of companies that span every significant industry. One of the simplest ways for investors to diversify is to consider some of these ETFs in 2023.
The challenges of inflation and potential recession are set to dominate the economic landscape in 2023 as they did in 2022, so in such volatile circumstances, it is vital for investors to take care and to avoid making simple mistakes such as those outlined above. With sensible and shrewd investment, you can increase your chances of showing a profit in 2023 and beyond.