Why People Lose Money in the Stock Market

by on September 29, 2011

It’s a fact that people lose money in the stock market.  Let’s face it, there are good and bad market days and nobody wins everyday.  However, there are quite a few people that lose in the stock market over the long term.  By losing, we don’t mean necessarily losing money, but rather, underperforming the market over the long run.  Here are some of the investing mistakes that are made by investors that can cause long-term underperformance:

Leaving the Market During Turbulent Times.

When times get tough in the stock market and prices plunge, many investors sell some or all of their stock.  Many investors walk away from the market altogether, waiting for volatility to subside.  It’s true that these investors may have temporary reprieve from falling prices, but when prices shoot back up, they won’t be invested.  And, as often is the case, the first week or two of a bull market often account for 50 percent of the returns.  In other words, if you aren’t invested in the market when it hits bottom and capitulates, you could miss out on half of the bull market.  Also, once the bull market is back and you’ve missed out on the initial returns, it’s harder to buy stocks after they have risen, for worries that they’ll fall again or for greed that you’ll be able to buy them lower again if you wait.

Holding Onto Losers.

If you own a stock that hasn’t performed as well as the rest of the market.  There may be a reason the stock isn’t performing.  Many investors won’t sell shares that they are underwater on, even if the company’s prospects have changed.  Psychologically, they don’t want to be proven wrong, so they hold onto their loser stocks.  You should reassess your holdings as their prospects change and make your buy and sell decisions based on future potential, not past performance.

Selling Winners Too Soon.

When you buy a stock and it shoots up rapidly, it is tempting to sell right away and lock in the profit.  However, stocks typically go up for a reason, and good stocks will continue to rise for years.  Selling too soon is a great way to underperform the market.  An example is Apple.  If you would have sold it 10 years ago when it was up 100 percent, you’d have missed out on another 5,000 percent!

Not Taking Enough Risk.

If you don’t take enough risk in your investment portfolio you will underperform the market.  Historically, the stock market has risen over 10% a year.  Holding too many bonds, money markets or cash can greatly reduce your investment returns and lead to underperformance.

Taking Too Much Risk.

Taking too much risk can also be dangerous.  When the markets go up, people feel like they are invincible and sometimes use loaned money or margin accounts to buy more stock than they can afford.  This leverage works great when the market is rising, but when there is a plunge, you can lose almost all of your money in a matter of days.

Not Rebalancing Their Portfolio.

Most investors spend more time planning their vacation each year than they spend analyzing their investments.  If you don’t pay attention to your portfolio it can get out of whack and your returns can be compromised.

Paying Too Many Fees.

Investing in funds that have high expense ratios or paying high trading fees can quickly eat into your returns and cause you to underperform the market.

Making Big Bets.

When something seems too good to be true, it is!  Period!  There may be some hidden gems in the stock market, but don’t believe the hype and forecasts that you hear from all of the scam artists, crooked investors, and illegitimate companies.  Don’t make big bets because you think you know what a company is going to do.  You will be wrong more often than you are right and it will cost you a big chunk of your portfolio if you’ve made a big bet.

Trying to Time the Market.

Don’t try to time the market.  Stick with your investments during good and bad times.  No one, and I mean no one, knows what the market is going to do for the rest of the day, week, month or year.  Try to time the market and you will miss the biggest return days of the year.

Not Sticking With It.

People lose money in the stock market when they don’t stick with it.  Many people have lost money during a downturn and then simply stopped investing.  If you give up, you will never find the level of returns elsewhere.  Develop a stock strategy and stick with it for the long run.  Modify it if you want, but don’t give up on investing.

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