5 More Reasons Investors Lose Money

This weeks newsletter is an extension of last weeks where I talk about why beginner investors lose money in the stock market.

Last week’s reasons were:

1. Beginner investors don’t understand what they’re investing in

2. They sell at the wrong time

3. They invest on emotion

4. They want to break even

5. They invest money they can’t afford to lose

But there are 5 more reasons.

Here they are:

1. They don’t know their time horizon

If you don’t need the money for 10+ years, it doesn’t matter if the stock market is up or down today.

And if you need the money in 1-3 years, you shouldn’t be in 100% stocks.

Figure out when you’ll need the money, then invest accordingly.

Short term time horizons tend to call for less risky investments.

Long term time horizons can take on more risk.

Understanding this will be the difference between selling for a loss and buying the dip.

2. They don’t know their risk tolerance

Your risk tolerance depends on:

- Age

- Cashflow

- Time horizon

- Appetite for risk

In general, if your risk tolerance is low, you should take on less risk.

And if your risk tolerance is high, you can take on more risk.

A great way to understand your risk tolerance is to experience a bear market.

How do you feel when your portfolio drops?

That should determine how much risk you can take.

3. They follow the herd

Just because someone did the research doesn’t make it good research.

And just because a lot of people are buying/selling a stock doesn’t mean you should too.

This is why market bubbles and market crashes exist.

Too many people investing blindly.

Always be sure the conviction you have in an investment is derived from your research and understanding of the asset.

If your decision to buy is backed by someone else’s conviction you’re setting yourself up for failure.

4. They chase performance

The goal of every investment is to generate future returns.

But when you chase performance, you’re chasing past returns.

Past performance is not indicative of future performance.

So when you buy an asset that already did well, you can be certain you missed the run up, but not whether there will be another.

If you want to be a better investor, start by predicting future cash flows instead.

5. They’re impatient

Building wealth is a marathon, not a sprint.

This is especially true for young investors with long time horizons.

So if you need the money now, it shouldn’t be invested.

And if you don’t need the money, you shouldn’t be trying to get rich quick.

The moment you throw away your plan for the “possibility” of getting rich quick is the moment you lose.

And investing is a very easy game to win if you do it correctly.

That’s all for this weeks newsletter.

See you next week!

- Wolf