Why People Lose Money in the Stock (Share) Market, and How You Can Avoid Being One of Them
Investing in the financial markets is a great way to build wealth over time. But it's not unusual to lose money in the short term, even if usually those losses are just losses on paper as investment values go up and down. Investing takes patience so don’t run away when share prices drop.
Here’s what you need to know about why some people lose money in the market and how you can bounce back from a loss in your investment portfolio.
Ignoring Market Cycles and Global Events
One reason people can lose money in the market is because they don’t understand economic and investment market cycles. Business and economic cycles expand and decline. The boom cycles are fueled by a growing economy, expanding job market, and other economic factors.
When inflation creeps up, prices rise, and GDP growth slows. In this case, the stock market can also decline in value.
Investment markets also rise and fall due to global events. For instance, on 20 February 2020, stock markets across the world suddenly crashed after growing instability due to the Covid pandemic. During the crash, there were multiple severe daily drops in the global stock market, the largest drop was on 16 March, nicknamed ‘Black Monday II’ of 12–13% in most global markets.
As we all know, investment optimism soon recovered, and within months all investment markets rebounded to reach new highs.
Pro tip: If you want to avoid losing money during a market-wide drop, your best bet is nearly always to sit tight and wait for your investments to rebound. Or, invest more if you can!
Not Doing Any Research
There are tons of articles, websites, videos, online newsletters, and courses where self-proclaimed “financial gurus,” all tout the latest stock or fund you should be investing in. Heck, even friends or family can be guilty of this too!
Too often though, people blindly follow these recommendations or advice without doing any research of their own.
Many of these “recommendations” might be paid for by the company whose stock or fund it is. Additionally, further recommendations might be based on the commentators own goals, but you and your investing situation is unique.
It’s also worth considering: if these online gurus are so smart, why are they selling or telling everyone else their top pics, if they were that great at investing then surely they should be preoccupied somewhere on their superyacht?!
Pro tip: understand the “why” and “what” before investing in something to ensure it fits you, your goals, and the amount of risk you’re willing and able to take.
People lose money in the markets because they let emotions — mainly greed and fear — drive their investing. Behavioural finance is the term given to the marriage of behavioural psychology and behavioural economics, and this explains why investors make poor decisions. If you learn basic behavioural finance concepts, and master your emotions to avoid making rash moves, you can save yourself a lot of mistakes over the long term.
For example, following the herd mentality is one of the worst behavioural mistakes you can make. It plays out whenever you blindly go where most others are going. Herding in investing occurs when you let "the group" guide your choices. It leaves out the step of evaluating all current information and then choosing. An example of this could be piling into Bitcoin or other cryptocurrencies just because everyone else is talking about them at any given time.
Pro tip: To avoid losing money in the markets, don’t follow the crowd, and don’t buy into overpriced assets. Instead, create a sensible investment plan, and follow it.
Trying to Get Rich Quick
Some people lose money in the markets because they think investing is a get-rich-quick scheme. You can quickly lose your investment dollars by attempting day-trading strategies, or trying to chase the latest meme stocks.
The Dalbar study of investor behaviour found that for 2018, the average investor underperformed the overall market for the 25th year in a row. For 2018, the S&P 500 (the most common measure of the largest market in the world) retreated 4.38%, while the average investor lost 9.42%. The reasons are simple. Investors try to outsmart the markets with frequent buying and selling, which rarely delivers superior gains.
Pro tip: Remember the lesson from the old fable the Tortoise and the Hare, a "slow and steady" strategy will nearly always win the race.
With improving technology, the fee structures of investment companies and brokers is improving.
Admittedly, 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.
When it comes to investing, you need to accept that you’ll always be paying fees somewhere, which is only fair. It could be membership or platform fees, fund manager fees, foreign exchange fees, brokerage, or a combination of all of these.
Paying fees isn’t necessarily an issue, the issue is when those fees are unreasonable, or when you invertedly incur a bunch of costs without realising it.
Pro tip: Ensure you’re totally clear on all the charges and fees you’re paying. Then, ensure those fees are competitive and suit whatever you’re doing.
As we become more experienced investors, we learn that diversifying our assets is key to success! Even as a newbie, you’ll constantly read information about diversification.
The goal with a diversified portfolio is to include various industries and categories that react differently from each other. This helps weather against stock market corrections, rough economies, wars, natural disasters, pandemics, and bear markets.
Even then, you’ll still experience some losses.
Pro tip: always diversify!
The Bottom Line: Why People Lose Money When Investing in Shares
Just like most areas in personal finance, there’s nearly always the chance to change approach, including if you need to fix one or more of the areas listed above.
As you get older and wealthier, your investments and strategy will change, but for now it’s important to know why most people lose money in the stock market and ensure you don’t become part of that crowd.