In times of great financial uncertainty, it is important to make sure you are not making any common investment errors. This is as true for novices with a couple thousand in a Robinhood account as it is for more seasoned investors.
Here are five common mistakes everyone should avoid in light of today’s headlines - Russia's invasion of Ukraine, skyrocketing inflation, and higher stock market volatility.
1. Chase Gains and Risk Your Nest Egg. You should emphasize principal protection over short-term gains. This is not the time to be making bets on meme stocks. If you have a choice between a boring but stable investment in, say, a well-rated dividend stock fund, or a Robinhood bet on the next potential moonshot tech IPO, the former is the wiser choice. There will be other moonshot IPOs when the markets settle down.
2. Go it Alone. Holding only a few cheap index ETFs seems sensible when the markets were climbing every year. But now it makes sense to add some actively managed funds to diversify your holdings. Yes, you have to pay more for mutual funds, but there’s an upside in turbulent times. Professional managers can diversify more widely and act faster than you can, and it is their job to keep on top of the market. Value funds, which target undervalued stocks, get a boost in volatile markets, so consider them. Look to fund ratings by Morningstar or Lipper to find best-in-class investments.
3. Make Decisions Based on the War. It's a mistake to plow into defense stocks like U.S. giant Raytheon or Britain's BAE Systems. Some of these might indeed get a boost from the war. However, it’s usually more complicated. Boeing is the third-largest defense contractor in the world. But its commercial business just took a hit due to sanctions against selling or leasing planes to Russia. Also, don't drop any of the 300-plus (as of mid-March) companies that have voluntarily pulled out of Russia, unless their business was very reliant on it. There are only a few of these, like BP, which will lose $25 billion by cutting its business ties in Russia. But for Apple, McDonalds, Starbucks, Amazon, and a host of others, Russia generated only a smidgen of revenues. War-related changes in earnings for most companies will be minor and short-lived.
4. Listen to the “Gold Bugs”. This is a time of uncertainty, not an apocalypse, despite what gold boosters say. Stocks outperform gold by three-to-one over long periods, because they generate earnings, which gold does not. It might make sense to diversify your holdings with an ETF of gold mining stocks, since these companies do have earnings. But limit it to 5-10% of your portfolio.
5. Jump into the Next Big Thing. We’re looking at you, crypto. Cryptocurrency use by Russian entities to evade the sanctions could precipitate a regulatory crackdown. If all the nations in the sanction bloc were to restrict crypto trading or demand more transparency, it could drive cryptocurrency prices down.
The most important thing to remember is: Don’t Panic! During the Cold War, President Dwight Eisenhower used to quote the White Rabbit from Alice in Wonderland, telling his staff, "Don't just do something, stand there!" He didn't want crises to spur his staff to react without thinking. That's a good rule for investors, too.