Investment decisions should be driven by a long-term plan, rather than by gut feeling or current events.
Holding a well-diversified mix of investments has often led to better outcomes, historically, rather than focusing only on the market's top movers.
Interest rates on short-term CDs and Treasurys may still be high, but holding too much in these investments could hurt long-term growth potential.
Investors may be focused too much on the risk of a market pullback, and too little on the chance that the market keeps rising.
Every investor can look back on their track record and think of a few things that they wish they’d done differently.
If you see yourself in any of the mistakes below, don’t beat yourself up or lose sleep. Instead, remember that investing is a lifelong learning process, and a big part of that process is getting real-world experience and learning from your mistakes. The best anyone can do is try to learn and move on.
And if you read through the list below and don’t recognize yourself in any of the mistakes then congrats—you might be a better investor than you realize.
Read on for 7 top mistakes that investors are making now.
1. Worrying that every market stumble is the start of a crash
Sudden market pullbacks are always unnerving. And investors who are already anxious about stocks might see every market stumble—such as the ones experienced in April, July, and August of this year—as the potential start of a major downturn.
But the truth is these temporary setbacks are actually routine occurrences in the stock market. “Markets don’t go up in a straight line,” says Denise Chisholm, director of quantitative market strategy for Fidelity. “Market corrections and steep pullbacks always feel like a panic. But in fact they’re very common.” Just as a mountain climber needs the occasional break to refresh, the market sometimes needs to take a breather and regroup before it continues its march.
Oftentimes, these pauses or temporary declines signal that the market is processing new information and that investors are recalibrating their expectations. Far from always being bearish signs, sometimes these dips can indicate that the market is coming into better balance. (Read more about why the recent pullback may have actually created opportunity potential.)
2. Avoiding the stock market because it’s gone up
Even after the market’s recent pullback, US stocks have had a strong year so far. Given the series of new all-time highs it’s made in the past few months, many investors may be wondering if it’s time to get out, not in.
“After seeing the stock market rise quite a bit, many investors start to wonder whether or not this may continue,” says Naveen Malwal, institutional portfolio manager with Strategic Advisers, LLC, the investment manager for many of Fidelity’s managed accounts. “Hearing that the market has made an all-time high may even make some investors nervous enough that they avoid investing more or even cash in some of their winners.”
Part of the concern may stem from misunderstandings of market history. When investors and analysts describe past market cycles, they often note that the market made a new all-time high before declining, with the all-time high marking the end of a bull market and the start of a bear market.
But this can lead to a misconception that any all-time high will precede a pullback. “If you look back historically, the market making an all-time high is a very common occurrence,” says Malwal. Bull markets have often spanned multi-year periods when the market has made one all-time high after another. Investors who took every all-time high as a sell signal would have missed out on substantial gains.
“It’s not true that whenever the market has made an all-time high, a correction has come around the corner,” says Malwal. “More often, the market has continued to rise.”
3. Focusing too much on a narrow group of stocks
The recent bull market has been unusually concentrated, with only a few stocks accounting for an outsized portion of the market’s returns since 2022.
This kind of market dynamic can be a recipe for investor distress. Investors who missed the ride can get hung up on regrets. “Many of us end up kicking ourselves for not having invested more in a space that has done remarkably well,” says Malwal. Investors who caught the wave may see their portfolios grow increasingly concentrated, and face the fraught decision of whether or when to sell.
But ultimately, trying to make big bets on small groups of stocks may be very risky, and leave an investor vulnerable to a correction. Instead of fixating on recent big movers, focus on formulating a sensible and well-rounded plan for the future.
“Rather than trying to guess what’s going to be the next big thing, what we have found helps investors more over the long run is to diversify and invest across a whole host of investments,” says Malwal. “Investors who are diversified may not experience so much of the booms or busts that might occur with a narrower set of investments, so they tend to have an easier time sticking with their plan, and they historically have experienced healthy growth.”
4. Holding too much in CDs and other short-term investments
Short-term CDs and Treasurys have come into favor among many investors in the past 2 years as rates have risen. Many investors feel comfortable in these investments due to their low risk of default and predictable cash flows.
“There are many wonderful features of short-term investments,” says Malwal. “But investors with a long-term outlook have historically often been better off in stocks.”
The key challenge with short-term investments is a lack of stronger growth potential. “While it’s true that stocks may be more volatile than short-term investments or bonds in the near term, over the long run stocks have provided much higher returns,” says Malwal. Although rates on these investments may appear attractive, they may not be providing much growth after accounting for inflation. Moreover, with rates potentially poised to fall if or when the Federal Reserve starts cutting rates, staying in short-term positions could leave investors exposed to reinvestment risk.
Says Malwal, “Investors who have time on their side can typically benefit from having a broader exposure to stocks and bonds, or a combination of the 2, as opposed to staying in short-term investments for a long time.”
5. Not factoring taxes into investing decisions
Investors often think of their brokerage accounts as accounts they should use for trading stocks or pursuing their latest ideas. But because brokerage accounts are not tax-deferred, Malwal says this can lead to one of the top mistakes he sees: generating a bigger tax bill than necessary.
Actions like trading a lot and holding tax-inefficient investments can increase investors’ tax bills. “Generally speaking, in taxable accounts, investing tax-efficiently and making gradual changes may help investors keep more of what they earn before taxes,” he says. Simple actions like choosing a mutual fund that trades less or keeping in mind the potential benefits of lower long-term capital gains tax rates may help investors keep more of what they potentially earn.
6. Letting the perfect be the enemy of the good
Analysis paralysis can be a problem for any investor.
Even if you’ve come up with a solid investing plan, it can be easy to get hung up on “what if” questions. What if I’m missing out on an even better investment option? What if the market crashes tomorrow? What if my plan just doesn’t work out?
The reality is that investing is inherently uncertain. Even the most experienced investors can only work off estimates, not certainties. While investors might worry about the “right” answer to any given investing question—like what investment to buy or when to get into the market—the fact is there may be a range of reasonable solutions.
But one thing has been true time and again historically: Over long periods, investors have done better by being in the market than being out of the market. If you’ve got a well-rounded, suitable plan that’s sensitive to your financial needs, then don’t let hangups about the perfect investment or the perfect time derail you from your goals.
7. Focusing too much on news headlines and politics
There’s no shortage of worries or risks in the world right now.
Malwal says he sees many investors staying out of the market in the hopes that the landscape will look more stable at some future time. “Some investors feel like they should wait because there’s an election happening. Or maybe they want to wait until their candidate is in the Oval Office, or until Congress is favoring their preferred issues,” he says. Others may worry about the tense state of global affairs, or risks to the economy.
Rather than using news headlines or gut feeling as indicators on the market, Malwal suggests investors go deeper into the economic data that actually helps drive the stock market—like corporate earnings, economic growth, stock valuations, and consumer spending. This data may not paint as sensational a picture as news headlines, but may be a better guide to market potential. (Read more about the “vibecession,” or why investors may feel the economy is weaker than it is.)
After all, the world has always been perilous. “It’s very rare for me to sit back and think, ‘There’s nothing to worry about right now,’” says Malwal. And yet, through decades of uncertainty and challenging news headlines, the market has still made big strides.
Global Head of Fixed Income Jim Cielinski and Head of Global Short Duration Daniel Siluk discuss how the Federal Reserve’s (Fed) December decision illustrates that sustained U.S. economic growth comes at the price of a higher rate trajectory.