Investing in stocks can seem really scary and intimidating especially when you hear personal experiences about losses. And yes, it does carry risk! However, avoiding these mistakes, educating yourself and doing research will substantially increase your likelihood for success.
Just a note that I am a long-term investor that prefers stable and lower risk investments. I don’t personally advocate for day trading, cryptocurrency or any form of gambling. Probably because I am not particularly good at either.
If you’ve met someone who has lost a lot of money in the stock market, there’s a good chance they’ve have done one of these five things:
1. They buy individual stocks of a trendy company without doing sufficient research
Only a small percentage of investors know how to pick a winning stock and make millions in the market. These investors know how to analyse the market by looking at the company and industry, charts or a bit of both. Unfortunately, many regular investors think they can achieve the same and try to randomly choose stocks based on what they think will do well without solid research. This often doesn’t end well and can leave a bad taste about investing overall.
Your exciting medical marijuana penny stocks are the share market version of the sexy bad boy with a criminal past. So exciting, so tempting, may potentially give you trauma. That well-diversified ETF with low management fees is the sweet but boring nerd who gets you flowers. Bland and tasteless but will make sure that you’re always happy and well taken care of.
2. They have high expectations and want significant returns in 12 months
Investing isn’t a get-rich-quick scheme. It takes a lot of time and work. I’ve assisted many people getting started with investing, only for them to be very disappointed when I showed them what their returns would actually look like.
One woman in particular wanted to invest $4,000 for 5 years with no extra contributions. When I told her it would amount to $6,000 – $7,000 she said she expected it to be at least $40,000. That is an unrealistic expectation, especially if you aren’t willing to take on a lot of risk. Here’s the thing. Long-term investing will make you a millionaire. But, it takes decades to build wealth and truly capitalise on the market. Don’t expect a 300% return in 6 months. If that was possible, I’d be able to purchase my dream home in Melbourne by now!
3. They get upset when their portfolio fluctuates and end up taking a loss so it “doesn’t go down more”
If you want to invest, you need to be able to control your emotions. Watching your portfolio go down in value is really difficult. You know what’s more difficult? Walking away from that portfolio without selling, even though it could keep dropping more and more. I’ve been there and wow, it is tough. Even tougher than the time I got cheated on.
Many new investors succumb to their feelings and end up selling their investments, taking a loss to prevent an even greater loss. Often, if they had simply ignored the investment it would have not only fully recovered, but resulted in a substantial profit. To avoid this, simply remind yourself that this is for the long-term. That market fluctuations are completely normal and a part of investing.
4. They try to time the market to get in at the “right time”
For my newbies, you can invest in “two” main ways. You can purchase stocks without any regard for the price – for example, I invest a certain amount monthly regardless of the stock price. Timing the market is a “strategy” where you wait until the stock price has dropped to invest to get a better price.
The latter might make more sense at first, but it is incredibly hard to do. Even finance professionals struggle to get this right. Many factors can cause the price of a stock to change, making it unpredictable. Why is this bad? Research shows that many investors who try to time the market end up panicking and bailing out at the wrong times. They miss out on significant gains and end up taking losses.
I have a bit of a sad story. My other half is unfortunately a market-timer despite me showing them compelling evidence and research. Instead of committing a stabbing, I instead try to be grateful that they’re at least interested in investing.
5. They invest money that they actually need within a few years
As previously mentioned, it takes time to make money in the stock market.
When people invest money that they need in the short-term, they may be forced to sell at a loss because they desperately need the cash. If you don’t need the money right away, you can essentially “afford” to leave the money in the market and ride out any fluctuations. This is one of the worst case scenarios of investing and can often be avoided quite easily.
If you need the money in under 5 years (house deposit, travel, wedding) – don’t invest it! Simply leave it in a high-interest savings account.
And, that’s it! The next time someone tells you that they lost money in the stock market – ask them what actually happened instead of being scared of investing. You’ll find that they likely made one of the 5 mistakes above!