3 risky investment strategies to avoid like the plague | Smart Change: Personal Finance

(Katie Brockman)

Investing in the stock market is not always easy, but it is one of the most effective ways to build wealth over the long term. With the right strategy, it is possible to make millions of millions of dollars or more in the stock market.

However, with a less than ideal strategy, you could potentially lose everything you invest. While everyone has a slightly different approach to investing, there are a few strategies that are riskier than you might think.

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1. Investing in Penny Stocks

A penny stock is a low-priced stock of a smaller company, and they typically trade for less than $5 a share. Their low price may make them attractive to investors on a budget, but there are several dangers associated with this type of investment.

First, the companies behind pennystocks are often small organizations that may not have such a long history. They may also not have much (if any) publicly available information, which can make it difficult to research these stocks and determine if they are solid investments.

Penny stocks can also be extremely volatile, experiencing significant price shifts from day to day. In addition, there are often not that many buyers available with this type of investment. That means if the price starts to fall, you may not be able to sell your shares right away – which could lead to significant losses.

Where to invest instead: Fractional shares can be a smart alternative to penny stocks. With fractional shares, you can buy a small portion of a single share for as little as $1. This way, you can still invest in big-name stocks without the hefty price tag — and avoid the risk of penny stocks.

2. Put all your money in one investment

Some stocks can experience explosive growth, and it’s tempting to think about how much money you could make if you put every dollar into that investment.

In retrospect, it’s easy to look back on a stock’s performance and wish you had invested everything. At this point, however, it’s impossible to know for sure where a stock is headed.

Strong companies are more likely to see consistent growth over time, but that doesn’t mean they will never fail. If you put all your money behind one stock and that company doesn’t survive, you could lose your entire investment.

What to do instead: A safer option is to diversify your portfolio. Most experts recommend investing in at least 25 to 30 different stocks from different sectors. If one or two stocks (or even an entire sector) fail, it won’t wreak havoc on your entire portfolio.

3. Trying to time the market

Timing the market involves buying and selling your stock at the right time to mitigate the impact of downturns or crashes.

In theory, this strategy makes sense. If you sell your investments just before a market crash and then reinvest when stock prices are bottoming out, you can make hefty profits. However, the stock market can be unpredictable and no one (even the experts) can say exactly how it will perform in the short term. If your timing is not right, you could potentially lose a lot of money.

For example, let’s say you think a recession is coming, so you’re selling your stock now. If the market doesn’t crash and instead continues to rise, you’re missing out on that gain. Then, if you reinvest, prices will now be higher and you will pay a premium for the same shares you just sold.

On the other hand, if the market crashes abruptly and you sell your shares too late, you could sell your shares for less than you paid for them, holding your losses.

What to do instead: Rather than trying to time the market, it’s often better to just hold onto your investments for the long haul. Your portfolio may take a hit during a market downturn, but as long as you hold your stocks and don’t sell them, your investments are likely to recover once the market recovers.

The stock market can be intimidating, but it’s easier than you might think to make money investing. By avoiding these risky strategies, you will be on your way to building wealth in the stock market.

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