Many new investors are disappointed by the drop in their stock purchase value when they first start investing.
Investors often make rash decisions without understanding what has happened. This can lead to even greater losses.
This is a common experience in investing. I’ve certainly had it. Looking back on my own mistakes and doing research, I found that there are other reasons for people to lose money in stock markets.
It is important to note that there are no guarantees of success or returns. If you plan to invest for the long term, then the information below will benefit your finances and future.
Table of Contents
Why people lose money in the stock market
No Research
You Can’t Get Rich Quick
Ignoring fees
Diversification is not the answer
Let Emotions drive your investment decisions
Complicate Your Investments
Final Thoughts
Why people lose money in the stock market
Probably you’ve heard that 90% of investors lose money on the stock market. This statistic is more about people who are day-trading without any real knowledge than long-term investors.
Even if this is true or not, it’s still true that many people make costly errors when investing in the stock exchange.
The reasons for investing are many, but they are easy to forget or overlook, especially if it is your first time.
Even if you adjust your mindset and approach, there are bound to be losses from time to time due the market or economy.
Let’s look at some of the main reasons why people lose money on the stock market.
Stock Market Loss: 6 Reasons Most People Lose Their Money
No Research
You will find a lot of articles online, “finance experts” who claim to be so, investing newsletters and even family members or friends promoting the latest fund or stock you should invest in. Even websites such as Morningstar rate different funds and stocks.
People often blindly follow advice or recommendations without doing their own research.
It’s not that difficult to read a prospectus for a fund or stock once you know what information to look for.
Some of these “recommendations”, may be paid for directly by the stock or fund company. Other recommendations may be based upon the goals of that individual, but your situation and investing is unique.
Before investing, you need to understand “why” and what” of the investment.
Note: Not every recommendation or review about stocks or mutual funds is bad or paid, but you should still do your due diligence before committing money.
You Can’t Get Rich Quick
Many people lose money on the stock market, because they believe that investing will make them rich quickly.
You’ve probably come across wealthy penny stock or day traders if you’ve been researching investing online.
You think that it is easy money when they show off their money, expensive cars or extravagant travel. You’ll almost always lose money if you try to follow them and emulate their lifestyle.
A Dalbar study also showed that from 1997 to 2016, the average active investor in the stock market earned 3.98% per year, while the S&P 500 Index returned 10.16%.
Investors who try to manipulate the stock market by buying and selling constantly to make quick profits can end up with this.
You should ignore the pitches that promise quick riches or “must-have” investments and focus on long-term growth.
Ignoring fees
The fee structure for investment companies and broker is improving. This doesn’t mean that there aren’t any brokers who charge high or hidden fees.
It’s not the fault of beginners when there are so many things to learn about investing. If you are aware of fees but do nothing, you are responsible for any losses.
When it comes to investment, you need to know what fees are associated with stock/fund purchases/trades. You might not be aware at first of how 1-2% can affect your results, and how that compounded over time.
Two money tools can be used to help with investments and fees.
Personal Capital: This site is free to use, and it has a “fee-analyzer” that can reveal hidden fees and make basic recommendations for maximizing your return.
Blooom: Blooom will analyze your 401k plan for free to determine if you’re paying too much in fees, if it is diversified, and other factors.
Diversification is not the answer
As you gain experience, you will learn that diversifying assets is the key to success. Even as a novice, you will read about diversification.
Diversifying your portfolio will help you weather stock market corrections or rough economic times.
A diversified portfolio should include different industries and categories, which react differently. It helps to reduce the risk, particularly over time.
Even if you diversify, there will be some losses.
Certain stock funds may offer higher returns, but also greater risk. You might be able to do well if you invested all your money in that fund during a good market. As soon as the market turns red, all your returns can be wiped out.
This is why investors mix funds such as stocks, bonds and REITs with cash, real estate or commodities like gold, silver and other metals. What you decide to invest in will ultimately depend on your goals and time horizon. But diversification is always important.
Let Emotions drive your investment decisions
Being human and showing your emotions can be great. When it comes to investing, emotions can lead to costly mistakes and bad decisions.
In my first few months learning about investing, I found this aspect to be the most challenging.
It’s difficult to avoid making emotional decisions when you have the media, fluctuating stock markets, other people telling you what to buy, and your attachments to certain assets.
It’s one of the main reasons why people lose their money on the stock market. Here are some examples:
You are too invested in one company, either because you love its product, worked there or your family has a history of working there. You base your investment decisions on this alone.
You are playing into panic and greed by listening to what others tell you.
Instead of buying low and selling high, let your emotions take over and buy high. There are new records, and everyone is excited.
When things start to go downhill or corrections begin, you become nervous and panicky and you sell at a loss. It would have recovered if you had stayed and invested consistently.
These are only a few examples, but hopefully you can get the idea. When it comes to investing, you should try and remove emotions as much as possible.
Complicate Your Investments
You may be complicating your investment portfolio by having too many funds, trying to find random ways to earn money through investing, or tinkering around with it too much. Here are a few things that could be complicating your portfolio.
Personal, I prefer to be in control of my finances, so I manage them manually. Even then, I would still adhere to the same simple investing principle.
My retirement account has 4 funds that give me exposure to U.S. and international markets, bonds in some percentage, and a smaller percent of a REIT. That’s it!
Bogleheads Three Fund portfolio is a principle that many long-term investment should consider.
Three Index Funds create an effective and diversified portfolio. Learn more about this portfolio here.
Bogleheads follow Vanguard founder John Bogle’s philosophy of simple index investment. Bogleheads are active investors who take part in the Bogleheads Forum.
Robo-investing is a great option for those who do not have time to invest manually. It does the majority of the work.
The goal of robo-investing, at its core, is to maximize your results while minimizing your involvement. You can send your decisions to a robo advisor who will do the work for yourself based on the questions and goals that you provide.
Here are the best options to consider, if you decide to take this path:
Wealthfront
M1 Finance
Ally Invest
Betterment
Did you know? Did you know? The U.S. Stock market accounts for 40% of the global stock market capitalization. [Seeking Alpha]
Final Thoughts
In the early days, I was guilty of all the things I listed above. It’s very easy to make mistakes and lose sight of your overall investment strategy.
You can change your ways and overcome any mistakes you have made in the area of personal finance.
Stick to your plan and don’t let the stock market crash ruin you.
You will need to change your strategy and investments as you age. But for now, it is important to understand why the majority of people lose money on the stock market.
