| ||||||||||||
We all need money management advice, whether you’re an experienced investor or a young adult trying to purchase your first home. MassMutual’s team is here to help.
Today’s insights, aimed at helping investors avoid costly mistakes, come from Mitchell Mass, a financial professional with ClearView Financial Solutions in New York City.
Q: What’s the biggest financial mistake you see average investors make?
A: The biggest mistake I see is failing to account for margin of error. It’s fun to think about the next thing you want to invest in, but many fail to budget for being wrong. Wrong about timing, wrong about how steady income will be, wrong about how they will react when the market drops 20 percent in a single day.
Margin of error isn’t about the markets; it’s about life and being human.
Many investors build a strategic plan based on their long-term goals and willingness to take risks. But all too often they make the mistake of building that plan based on an expected annual market return, without allowing for ebb and flow. I see two common outcomes from this oversight:
- Being forced to sell securities at a loss when unexpected expenses hit.
- Freezing when the stock market drops because there is no strategy in place for how to respond to changing market conditions.
When you pull money out of the market during a downturn, you aren’t just locking in a loss. You're very likely to miss the recovery, which can occur sooner than many investors expect. Whether it’s due to fear or necessity, people tend to focus on the risk of being exposed to the market instead of the bigger potential pitfall, which is being forced to sell at the worst time. (Related: 3 tips to avoid locking in losses)
Having a sound investment strategy in place may help give you the confidence to avoid panic selling during inevitable market downturns, which may help your account value benefit from the power of compound growth. Compound growth is the process by which your portfolio generates earnings on both your original investment amount and also on the accumulated gains, which can potentially cause the value of your investments to accelerate over time. While long-term investing can be powerful, market fluctuations and investment losses are part of the journey.
Unsung hero: The emergency fund
What makes long-term investing and compounding possible? The boring old emergency fund. The place you go when life happens, including any temporary bouts with unemployment.
Without a financial safety net in place, car repairs and medical bills go from an expense to a forced sale of investment securities that could have otherwise continued compounding over time.
The unfortunate thing is that emergencies and market downturns often happen at the same time because both are correlated to levels of economic stress. Just imagine what would have happened if you had gotten laid off during the financial crisis in 2008. A healthy emergency fund and a contingency plan can help insulate you and your investments from unexpected events.
In the right situations, that emergency fund isn’t just a defensive tool either. It gives you the options and flexibility required to act when opportunity presents itself.
In April 2025, “Liberation Day” tariffs sent the market into a frenzy, which led to a roughly 10 percent stock market decline in two days, the worst two-day stretch in history. Some of the investors who benefited most from the recovery were the ones who had cash on the sidelines to buy after the market declined. They had a plan in place that included the ability to act and a system for how to do it.
______________________________________
Frequently asked questions about the biggest mistakes investors make…
Q: How much should I have in an emergency fund before investing?
A: Most financial professionals recommend saving three to six months of living expenses in a liquid, accessible account before investing aggressively. Currently, a majority of Americans do not have enough savings set aside to cover their living expenses for three months or more, meaning most are one job loss or unexpected bill away from being forced to liquidate investments at a loss.
Q: What is dollar-cost averaging, and does it actually work?
A: Dollar-cost averaging means investing a fixed dollar amount at regular intervals regardless of whether the market is up or down. By doing so, you automatically buy more shares when prices are low and fewer when prices are high, reducing your average cost per share over time.
Q: Is it better to stay invested or sell when the market drops?
A: In many cases, staying invested may be more beneficial than reacting to short-term market declines. Market recoveries often happen faster than investors expect, which means many keep their money on the sidelines too long. Because the market’s best days tend to cluster around its worst days, selling during a downturn increases the chance of missing the recovery. (Learn more: When markets dive, keep your strategic calm)
____________________
Discover more from MassMutual…
Keep your budget flexible for unexpected expenses
How to set up and maintain an emergency fund
What is dollar-cost averaging? How does it work?
________________________________________
The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel.Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.
Securities offered through qualified registered representatives of MML Investors Services, LLC, Member SIPC (www.SIPC.org) and a MassMutual subsidiary. 1295 State Street, Springfield, MA 01111-0001.
