When new investors get started in the stock market, many times they are disappointed when their purchase value drops.
Not understanding why or what happened, often times the investor makes rash decisions where even more money could be lost.
It’s common to experience this in your investing adventures, I know I certainly did. But looking back at my mistakes and researching others, there are a few other reasons why most people lose money in the stock market.
There, of course, is no guarantee of your success or what percentage of returns you’ll have. But if you are investing for the long-term, the below information will be beneficial to your pockets and financial future.
Why People Lose Money in the Stock Market
You might have heard the random investing stat before, 90% of people lose money in the stock market. To me, that really refers to people day trading without real knowledge, not long-term investing for the future.
Regardless of how accurate that is or not, many people do make costly mistakes when it comes to investing in the stock market.
Many of the reasons may be obvious, but are also easy to overlook or forget, especially if you are new to the investing game.
And even if you do adjust your approach and mindset, it’s expected that there will be occasional losses due to the economy or market shifts.
That all said, let’s dive into some of the reasons people lose money in the stock market.
Not Doing Any Research
There are tons of online articles, supposed “finance gurus,” investing newsletters, and even friends or family all touting the latest stock or fund you should be investing in. There are even websites like Morningstar that rate various funds and stocks.
Too often though, people blindly follow these recommendations or advice without researching themselves.
I know reading a stock or fund prospectus can make your eyes glaze over, but they aren’t too hard once you know what to look for.
Many of these “recommendations” might be paid for by the company who’s stock or fund it is. And other recommendations might be based on that person’s own goals, but you and your investing situation is unique.
You are putting your hard-earned money to work, so you must understand the “why” and “what” before investing in something.
Note: Not all recommendations or reviews about stocks or funds are bad or paid for, but you still need to do your own due diligence before dropping cash.
Trying to Get Rich Quick
People lose money in the stock market because they think and assume investing is their ticket to getting rich quick.
If you’ve done research online about investing, you certainly have come across the wealthy day traders or penny stock traders.
They show off money, fancy cars, or lavish traveling, and you think it’s easy money.
But 99% of the time, you’ll lose money following and trying to emulate them.
Additionally, a Dalbar study showed from 1997 through 2016, the average active stock market investor earned 3.98% annually, while the S&P 500 index returned 10.16% in returns.
This is what happens when investors try to outsmart the stock market with constant buying and selling to make fast profits.
Ignore the get rich quick pitches or the “must-have” investments, you should be focused on your long-term investment growth.
Luckily, the fee structure of investment companies and brokers is improving. But, that doesn’t mean there aren’t brokers with high or hidden fees.
And it’s not always the beginner’s fault when there is so much information to understand about investing. But if you know there are fees and are doing nothing about it, that’s on you for losing money.
But when it comes to investing, you should know the fees that are involved with buying funds or making stock purchases/trades. Sometimes you might not realize at first how much 1-2% can eat away at your results and over time, how much that actually compounds.
There are two money tools that can help you with your investments and catching fees:
- Personal Capital: Free to use and they have a “fee analyzer,” which can show hidden fees and provide some basic recommendations to help maximize your returns.
- Blooom: If you have a 401k plan, Blooom offers a free analysis to discover if you are overpaying on fees, how diversified you are, and more.
As you become a more experienced investor, you learn that diversifying your assets is key to success. And even as a newbie, you’ll constantly read information about diversification.
By creating an investment portfolio with diversification, you help weather against stock market corrections, rough economies, or a bear market.
The goal with a diversified portfolio is to include various industries and categories that react differently from each other. This way it helps reduce risk, especially long-term.
Now, don’t think you won’t experience some loss even when diversified, because it happens.
For example, certain stock funds might have a higher reward, but so is the risk. If you went all-in with that you might do well during a great market. But as soon as things turn red, you can wipe out all returns and potentially more.
It’s why people mix in funds like stocks, bonds, REITs, cash, real estate, commodities, gold, silver, etc. Ultimately what you choose to invest in is based on your goals and horizon, but always diversify.
Letting Emotions Drive Investing Decisions
Showing your emotions and being human can be a great thing. But with investing, emotions tend to create costly mistakes that drive bad decisions.
I found this to be one of the more challenging aspects to investing in my first few months of learning.
Between the media, stock market fluctuations, others telling you what to do, and your attachment to specific assets, it’s hard not to make emotional decisions.
But it’s a big reason why people lose money in the stock market.
Here are some examples of emotional investing:
Being too invested in a specific company because you love their product, you work(ed) there, family history of working there, etc. So you base your investment choices on that alone.
The market is going up and down, and you play into the panic or greed because of what others are telling you.
Similarly, instead of buying low, selling high, you let emotions get the best of you and buy high because there are new records and everyone is excited.
Then when things turn to panic or some corrections set in, you get nervous and sell for a loss when it would have recovered had you held and kept consistently investing.
Those are just a few scenarios, but you get the picture. Remove emotions from as best you can when it comes to your investing.
Complicating Your Investing
Owning too many funds, looking for random ways to make money with investing, and tinkering with your portfolio too much. Just a few ways you might be complicating your investment portfolio.
Personally, I like to have a bit more control, so I manually manage my accounts. However, even then I’d adhere to a simple principle of investing.
I have 4 funds in my retirement account that get me exposure to U.S. markets, some international, a percentage of bonds, and smaller percent in a REIT. That’s it!
One principle many long-term investors should consider is the Bogleheads Three-Fund portfolio.
The Three-Fund Portfolio is to keep investing simple with three index funds that create a diversified and effective portfolio. You can learn more about it here.
Bogleheads are those who follow Vanguard’s founder John Bogle and his philosophy on simple index investing. They are also active investing enthusiasts who participate in the Bogleheads Forum.
Another way for people who don’t have the time or care to manually invest can use Robo-investing that does more of the work for you.
At a high level, the process of Robo-investing is to ensure you have the most hands-off approach to your money but are maximizing results. Instead of having to self-manage your choices, you send this over to a Robo-advisor that does the work for you based on questions and goals you answer.
Here are some of the best ones ti consider if this is the path you want to go:
Did you know? The U.S. stock market makes up the largest percentage of the world stock market capitalization at 40 percent. [Seeking Alpha]
All the reasons I mentioned above, I’ve actually been guilty of myself in the early days of investing. It’s easy to lose sight of the big investing picture and make mistakes.
But like most areas in personal finance, you can overcome and correct your ways.
Start to identify with the above reasons, stick to your money gameplan, and protect yourself during rough stock market years.
As you get older your investments and strategy will change, but for now it’s important to know why most people lose money in the stock market and not become part of that crowd.