A former investment manager at Goldman Sachs, a US investment house, who managed over 5.5 billion dollars explains why 90% of investors lose money in stocks.
1. “They don’t understand what investment is”, he says, if they don’t understand how a company makes money, they won’t know how it can lose either. This adds risk to the investment, a risk that can be prevented, and when it is not prevented, it loses money to investors.
2. They sell at the wrong time. There are only 3 reasons to sell a stock: You found a better alternative, the data of the stock changed or you achieved your goal.
3. They invest out of emotion. JA drop in the stock price does not necessarily mean selling, especially if nothing in the company has changed. And an increase in the share price does not necessarily mean a buy, especially if the company is still bad. Shares are very volatile in the short term, in the long term they rise, if the company is good.
4. Investors want to “break even” – “Break even” is when you refuse to sell the stock until it pays you back the losses it has accrued to you. While doing so, it is a loss, as you are exposed to further losses, and at the same time you are also wasting opportunities elsewhere that could pay you back the loss. Not all stocks recover from declines. Sometimes the money can pay for itself elsewhere.
5. They invest money they cannot afford to lose. Investing is risky, you are never guaranteed to make a profit. Maybe even lose. So when you invest money, invest money that you don’t need for the next 3-5 years.
6. Investors don’t know their time frames. If you don’t need the money for the next 10 years, it doesn’t matter if the market went down or up today. And if you need the money in the next 3-5 years, you must not have 100% in stocks. Figure out when you need the money, then invest accordingly.
7. Investors do not know their risk tolerance. Endurance depends on several things: your age, your liquid money, your time frame and your desire for risk. If your tolerance for losses is low, you should take less risks. Same thing in reverse.
8. following the herd Just because someone did research on the stock they bought, doesn’t mean the research was good. Just because a lot of people buy/sell a certain stock, doesn’t mean you should too. This is what creates bubbles, and this is also what bursts them, too many people invest “blindly”
9. Investors are chasing yield – The goal of any investment is to generate a future return. But as soon as you chase returns, you chase past returns. As soon as you buy a stock that has already risen sharply in the past, you are sure that you missed that rise, and you are actually “chasing” another one, which may not come.
10. Impatient investors – Capital building is long-term. This is especially true for young investors with a long investment time frame. If you need the money now, it shouldn’t be invested, if you don’t need it now, don’t try to get rich quick.
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