5 mistakes to avoid in a new stock market recovery

Whether a stock market recovery is on the cards this year, next year, or whenever, I expect to see investors making the same mistakes every time.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Is there a stock market recovery coming? The FTSE 100 hasn’t fallen into official bear market territory like the S&P 500 and the Nasdaq. But it’s still had a pretty dire decade. And we’re surely due a new bull market soon, aren’t we?

I’m not getting into the prediction game today. Instead, I want to address a few common investing mistakes I’ve seen that I hope investors can avoid during the next market rise.

Ignore social media

Social media is a relatively new one for me, as we didn’t have it for most of my investing career. But the principle is the same as it always was. Don’t follow the latest fad or fashion, and ignore those trying to pump their favourite shares. Social media makes this a bigger problem now.

By the time the internet is abuzz with the latest get-rich-quick shares, everyone will already know about them. And in my experience, that suggests they could be set for a fall.

Forget getting rich quick

In any sustained stock market recovery, we’ll see people trying to double their money overnight, for sure. It’s happened during every bull run I’ve ever seen, and I have no doubt it will happen again.

Sometimes the early investors get lucky, and make a good short-term profit. But they’ll often then pile into the next bubble to come along… and bubbles eventually burst. I still remember the huge losses I saw friends suffer when the dotcom boom collapsed.

Avoid short-term thinking

Both of these are results of short-term thinking. And it’s understandable. We’ve seen UK shares underperforming for years now. So we need to make the most of any gains while they’re happening, and get out before the next fall, don’t we?

Trying to time things like that is near impossible, and rarely leads to success. No, the best shares to buy for a stock market recovery are the same ones to pick any time, bear market or bull market. They’re companies with long-term profit and cash generation potential, when they’re good value.

Don’t confuse price and value

And that reminds me how important it is to not confuse share price with value. When investors see the early leaders of a stock market recovery, they will often buy simply because they’re going up.

That can work well, up to a point. But, almost inevitably, at some point the price will overshoot a stock’s rational valuation and keep going up. Every bull run, I see stocks reaching price-to-earnings (P/E) ratios that are unsustainable over the long term.

Stick to a strategy

Finally, what all these mistakes boil down to is a failure to develop an investment strategy and stick to it. This is a mistake I’ve made plenty of times before, and I fully expect to make it again.

My aim, though, is to seek companies, to use Warren Buffett’s words, “whose earnings are virtually certain to be materially higher five, ten and twenty years from now.” I want to lock in reliable long-term dividend income.

But if I see a profitless growth share that I think has a great chance? Well, I might plonk down a small amount.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »