New investors often fail in the stock market due to several common reasons. Understanding these pitfalls helps new investors make informed decisions, manage risks, and build a more stable and successful investment strategy over time. Here are our top common picks.
1. Not Doing Any Research
There are tons of online articles, supposed “finance gurus,” investing newsletters, and even friends or family all touting the latest stock or fund you should be investing in. Too often though, people blindly follow these recommendations or advice without researching themselves.
Many of these “recommendations” might be paid for by the company who’s stock or fund it is. And other recommendations might be based on that person’s own goals, but you and your investing situation is unique. You are putting your hard earned money to work, so you must understand the “why” and “what” before investing in something.
2. Trying to Get Rich Quick
People lose money in the stock market because they think and assume investing is their ticket to getting rich quick. If you’ve done research online about investing, you certainly have come across the wealthy day traders or penny stock traders.
They show off money, fancy cars, or lavish traveling, and you think it’s easy money. But 99% of the time, you’ll lose money following and trying to emulate them. Additionally, a Dalbar study showed from 1997 through 2016, the average active stock market investor earned 3.98% annually, while the S&P 500 index returned 10.16% in returns.
3. Ignoring Fees
When it comes to investing, you should know the fees that are involved with buying funds or making stock purchases/trades. Sometimes you might not realize at first how much 1-2% can eat away at your results and overtime, how much that actually compounds.
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4. Not Diversifying
By creating an investment portfolio with diversification, you help weather against stock market corrections, rough economies, or a bear market. The goal with a diversified portfolio is to include various industries and categories that react differently from each other. This way it helps reduce risk, especially long-term.
5. Letting Emotions Drive Investing Decisions
Showing your emotions and being human can be a great thing. But with investing, emotions tend to create costly mistakes that drive bad decisions.
Between the media, stock market fluctuations, others telling you what to do, and your attachment to specific assets, it’s hard not to make emotional decisions. But it’s a big reason why people lose money in the stock market.
6. Complicating Your Investing
Owning too many funds, looking for random ways to make money with investing, and tinkering with your portfolio too much. Just a few ways you might be complicating your investment portfolio. Personally, I like to have a bit more control, so I manually manage my accounts. However, even then I’d adhere to a simple principle of investing.
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