The 5 Worst Ways to Invest Money in the Stock Market - Cabot Wealth Network

The 5 Worst Ways to Invest Money in the Stock Market

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There are a lot of ways to invest money. Some of them are pretty good. And some of them are…not.

Whenever we write or talk about the different ways to invest money, we usually refer to methods that will bring in profits. After all, that’s why people invest. We also mention Warren Buffett regularly because, well, he’s one of the most successful investors ever. 

Interestingly, two of Buffett’s most concise and simple rules around investing are a bit tongue in cheek. They’re also easy enough for anyone to understand, whether you’re an experienced investor or you’re opening up your first investing account. Ready for these?

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Rule #1: Don’t lose money.

Rule #2: Don’t forget Rule #1.

While these seem easy enough, they’re a lot harder to follow than people realize. And while there are a lot of “right” ways to invest money, there are also some approaches that are almost guaranteed to give you a loss.

5 Ways to invest money that you will absolutely regret

First, we should probably be clear that people lose money in the stock market all the time. It happens. For success in the market, your goal is to make more than you lose. Every single investor has put money into a stock that ended up losing ground. 

That also brings us to one of the most common mistakes investors make when they think about ways to invest money.

1. Investing without a stop-loss. A stop-loss essentially means that when a stock sinks below a certain level, you sell it. For example, when stock XYZ drops 20% below your purchase price, get rid of it. It doesn’t matter how much you think it’s going to go back up. There are stories upon stories of stocks that hit a high point and dropped day after day, month after month, until there was nothing left. Now, your loss point doesn’t have to be 20%. It could be 10%. It could be 30%. And yes, volatile stocks can take you on roller coaster rides. So you may have different percentages for different stocks. It’s not so much the exact percentage that matters as it is that you can’t fall in love with a stock and let it bring you down.

2. Investing in stocks you love. Sort of. Speaking of falling in love with stocks, this is one of those tricky ways to invest money, because you do, in fact, want to love a stock. It’s classic advice: invest in what you know. Here’s the thing, though. You can’t let love blind you to reality. If you’ve ever watched an ’80s RomCom movie, you know this. Need another analogy? You might love going out in a sailboat for the day, but if you ignore the storm clouds on the horizon, you could be in trouble. 

3. Investing in certain cryptocurrencies. We might get in trouble for this one, but let’s look at the facts. There are thousands of cryptocurrencies on the market. Many of them sell for well under a penny. And almost all of them are highly volatile. Sure, if you were or are lucky enough to jump into the right crypto at the right time, and also sell at the right time, you could make big bucks. Dogecoin (DOGE-USD) in the first months of 2021 is a perfect example. The coin went up around 12,000%! But we’re talking about a coin that started the year at under a penny. By all means, invest your “fun money” in crypto. Everyone wishes they would have bought into Bitcoin (BTC) in 2010. Just be sure you aren’t putting your life savings or retirement fund at risk. 

4. Investing without doing your research. Researching stocks can be daunting, but it doesn’t have to be. In fact, basic research can be as easy as a few clicks on your computer. Obviously, we love the idea of delving into all the details of a stock. It’s what we do all day! But even a beginning investor can look at the fundamentals of a stock and pick out some essential facts. Is their revenue increasing? Do they have positive cash flow? What does the stock price look like for the past three years? This won’t tell you everything about a stock, but skipping this simple step is one of the worst ways to invest money. It would be like renting an Air BnB without looking at the reviews. 

5. Investing without patience. There’s no substitute for patience in the market. Stocks go up and down. But if you sell your stocks every time they drop a few percentage points, you’ll never hold anything long enough to make money. And no, you shouldn’t just sit idly by while your stocks plummet. Aside from that, however, sometimes it’s okay to do nothing. Don’t be an action hero. And don’t be in a hurry to try to buy in at the bottom or sell at the top. Get your portfolio in a safe, comfortable spot, take a breath and relax.

If you want some help navigating the market, be sure to browse our website, sign up for our daily emails, or explore our premium advisories, where we give you detailed advice on investing to meet your goals.

What would you say is the worst way you’ve invested your money in the stock market?

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