11 Best Ways to Lose Money in the Stock Market
Making money in the stock market can be as easy as regularly investing in a broad market index fund and letting it run for a very, very long while. But who wants to passively watch their investments grow slowly when they can go through the rollercoaster of emotions that is the full stock market experience?
If we listen to BlackRock 1, not that many people. According to their data, indexes “account for 17.5 percent of the $67.9 trillion in global equity market capitalization”.
So chances are that you, like many others, buy individual stocks. And if you do that, you must believe that you can beat the stock market. Well, don’t let me discourage you. But you might appreciate some tips.
Often people focus on what you need to do, but I often find it as useful to know what you shouldn’t do.
In that vein, here are the eleven best ways to lose money in the stock market
1. Use Leverage
Leverage or margin trading means borrowing money from your broker to place larger trades.
There is simply no better way to lose your money in the stock market than to use leverage. Indeed, the potential for a wrong trade to wipe your life savings in seconds is unmatched. Even if you end up closing a few trades in profit, pulling this off consistently is a challenge I wouldn’t recommend.
If your trade goes badly, you’ll either need to put more money in your account or your trades will be automatically closed by your broker to cover your losses. In the end, you might end up losing more money than the total value of your investment.
If you like gambling on the casino but you’d rather do it from the comfort of your own home, then speculating is for you.
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”Benjamin Graham
Speculators’ goal is to profit by predicting short-term price moves in an asset. For an example of speculators, just look at the people who got caught up in the crypto mania back when it was going up like crazy.
If you speculate based on gut feeling, emotions or following the herd, you might as well call it gambling.
“The individual investor should act consistently as an investor and not as a speculator.”Benjamin Graham
Don’t try to predict short-term market fluctuations. Base your decisions on facts and analysis.
3. Constantly check your portfolio
Watching stocks daily can wreak havoc on our emotions. Seeing stocks go down a few percentage points causes us real pain and stress. If the stock is going down, we feel stress because of the potential loss. On the other hand, if we stock is going up, we might consider selling at barely a profit because we fear it might go down afterward.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
It’s best to ignore the random, short-term fluctuations and let your portfolio grow at its own pace. If you only hold index funds, this is much easier psychologically to do. Indeed, we can all agree that the economy grows in the long term. On the other hand, if you hold a few stocks, there are much shakier guarantees as to their long-term performance.
4. Buy high and sell low
Most people already buy high and sell low when they should be doing the opposite. When the market goes up, they think that it will keep going up, so they invest. Similarly, when the stock market does down they sell because they think it will keep going down.
“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”Warren Buffett
The average stock market performance since 1926 is 7% (after inflation) and the market has gone up in about 70% of years. Despite this, investors still pay too much attention to short term fluctuations.
In every investment you do, consider the long-term.
5. Try to time the market
No one can consistently predict market corrections.
“Only liars manage to always be out during bad times and in during good times.”Bernard Baruch
Market timing is attempting to predict the market’s corrections to try to get in and out at exactly the right time to maximize profits. It’s basically the ugly cousin to speculation.
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”Peter Lynch
Trying to profit from big market changes paradoxically leads us to lose money instead. Don’t base your investing strategy on trying to identify corrections.
6. Trade often
By opening and closing trades often, you will lose money both on broker fees and on taxes.
7. Read the news daily
“Most of what you read online today is pointless. It’s not important to your life. It’s not going to help you make better decisions. It’s not going to help you understand the world. It’s not going to help you develop deep and meaningful connections with the people around you. The only thing it’s really doing is altering your mood and perhaps your behavior.”Shane Parris
The purpose of many financial news sites is not to inform you, but rather to generate the most attention-grabbing content possible. They are interested in filling their pockets, not yours.
Avoid news sites that:
- Encourage you to buy or sell individual stocks.
- Make predictions on future market movements (i.e: “a bear market is coming”)
- Mention patterns forming in the random movements of stock markets.
- Have click-bait titles.
8. Follow the crowd
Avoid making decisions based on how much a stock has been growing in the short-term.
Investing in indexes is again a great way to handle this.
9. Rely on a financial advisor to invest for you
One of the options to get started investing in the stock market is to rely on a financial advisor. They are trained professionals who actively invest in stocks in order to try to outperform the stock market.
The problem with using financial advisors is threefold:
- They often do worst than the market
According to Vanguard 2, for the 10 years leading up to 2007, the majority of actively-managed U.S. stock funds underperformed the index they were seeking to outperform
- They need to outperform both the market and their own fees
The vast majority of active funds have high fees, so not only do they need to outperform the market, but they also must make enough to cover the fees you are paying them!
- Choosing one of the few advisors who outperform the market is nigh impossible
Indeed, there’s just no way to predict which advisor will outperform in the future.
10. Trade using your gut feeling
Trading with your gut feeling is not investing. It’s gambling. Feelings have no place in a solid investment strategy.
11. Don’t learn from your mistakes
Mistakes happen. But learning from them is optional. Instead of moving on right away, consider looking back at what went wrong and what went right.
Did the mistakes happen because of inexperience or bad decision making?
How will you avoid the same mistakes in the future?
Sometimes we don’t have enough experience to know why we made a mistake. If you are in that situation, here are the two books I recommend to learn about good investment practices. They are not for the complete beginner.
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The Oracle of FI is a middle-class guy working as a software developer. His goal is to achieve full financial independence by the age of 40.
He started this blog in 2019 in order to share his tips and techniques on investing, saving money and making the most out of life.
He has a cat and lives in France.