I recently had a conversation with a coworker in the ER about investing, and the subject came up. They inquired as to whether or not I have a financial counsellor. It’s not tough for me to be a do-it-yourself investor, so I said no. My colleague’s next words are still fresh in my mind. According to their financial counsellor, “80% of the do investors lose money.”
A few more minutes passed, but to be honest, I can’t recall anything more about our conversation. However, it made me wonder if their financial advisor’s promise was true. Were they really using this as a stalling tactic to deter customers from leaving?
80 percent of investors who do it themselves lose money, right?
When I first saw this, I thought the advisor was scheming to keep their customer happy. As a result, I decided to investigate more and discover if this statement had any truth to it, or was simply fabricated by the media.
Two articles were found after a lengthy (but not exhaustive) online search. August 9, 1999 was the date of the first CNN Money article. Seven out of ten traders at a day trading firm lost money, according to the U.s. National Securities Supervisors Association.
The other one is a CuriousGnu blog post. According to the findings of the author, 79.5 percent of private daily traders lost money over a 12-month period, with a median twelve – month returns of -36.3 percent.
In my opinion, the financial advisor’s remark is exaggerated rather than untrue, based on what I’ve found. Day-trading may be considered an investment by some, but I don’t see it that way. No matter what your concept of an investment is, I’m sure there are some DIY investors that lose money. What if the percentage was at least 80%? I think it’s a little too high. It’s crucial to remember, though, that as a do-it-yourself investor, you may be leaving money on the table.
Paying Exorbitant Charges
Fees can certainly mount up and reduce your investment gains over time. Using this free online calculator, let’s do some quick math! For a $10,000 investment, we’ll evaluate the annual fees at 1%, 0.5%, & 0.1%. Over the course of 30 years, assuming an annual return of 8%, the following results are obtained:
The transaction with the greatest fee had the lowest final value, as was to be expected. It also had the highest opportunity cost; money spent on fees is money that is not being reinvested.
Many DIY investors are able to save money off fees through various methods. Investment in passively managed funds is a first option for those who don’t want to pay a lot of money in fees for actively-managed mutual funds. Investing in mutual funds can also be done without paying a commission or a load fee. Individual stock investors can also compare brokerages and investment platforms to find the ones with the lowest transaction costs.
Investing on the High and the Low
When you buy high and sell low, you’re almost guaranteed to lose money. There really are investors whom has lost money in this manner, despite the fact that common sense would tell them to avoid it. How is that possible? A behavioural concept called as herd behaviour may be to blame for this. In other words, people tend to imitate the acts and behaviours of others in their social group while they are alone. One can go to the squiggle bubble for a historical illustration of speculation and excitement. The rise of cryptocurrencies, particularly Bit, there at end of 2017 serves as a more modern illustration.
You can’t deny that herd mentality and the fear of losing out drove Bitcoin’s price to nearly $20,000, no matter what your opinion of the cryptocurrency is. Everybody and their mother was talking about Bitcoin at the office. Even those who had tried to explain why it was different from other cryptocurrencies couldn’t. They also had no idea what an index fund or a mutual fund were (true story). And panic selling occurs when the price drops significantly and everyone rushes to get out of the market to save money.
Do-it-yourself investors can escape herd mentality by following their own rules. Having an investment policy statement and a detailed investing strategy in place is one option. Make careful to do your own research and establish the quality of any potential investment. The decisions you make with your money should not be influenced by what others do. Too Much Confidence
As a do-it-yourself investor, you might benefit greatly from having a sense of security. But at the other hand, overconfidence is a whole different animal. It can lead to illusory superiority, where you overestimate your own abilities in relation to those of others.
Investors might lose money in various of ways if they are overconfident. When markets are volatile, it’s easy to overestimate your risk tolerance, which can result to panic selling. In the search of larger profits, overconfidence in your abilities to invest could lead you to take on more risky investments, deal more frequently, or attempt to time the market. You could lose money if you take any of these steps.
It’s wise to leave your ego at the door if you’re an average do-it-yourself investor. Individual investors may not have the same access to finance analysts and information as fund managers. Given that the vast majority of all these managers fail to outperform their benchmark, I believe that most self-directed investors will fail, too. So stop attempting to emulate Warren Buffett and instead focus on your own success. Instead, follow his suggestion and put your money in an index fund tracking the S&P 500.
Failing to Take Enough Risk
If you’re excessively cautious when it comes to your investments, you’ll lose money, although not in the traditional sense. Inflation can have a negative impact on conservative investments. Here’s an illustration of what I mean.
I started a Roth IRA in June of that year. So I did end up depositing $200 inside a cash account because of my lack of knowledge at the time. My initial investment of $100 has grown to a whooping $200.81 as of right now. Although I didn’t lose any money in respect of my initial investment, I did. My account would be worth $185.07 in 2012 USD if I used this online calculator. This is a prime illustration of inflation’s impacts.
Your investments should be aligned with your long-term financial goals. You shouldn’t, for example, put money at danger that you’ll need in the near future. You should place more emphasis on capital preservation than on return on investment in this case. For long-term investments, you should be willing to accept a higher degree of risk in order to avoid losing purchasing power to inflation.
Simply by speculating rather than making an investment
What is the difference? “A speculator buys equities hoping to make a short-term profit over next days or even weeks,” Burton Malkiel writes in A Strange Walk Down Wall Street. An investor’s goal is to buy equities that, over the course of several years or decades, will provide a steady stream of cash and capital gains.
A stock’s short-term volatility can be exploited by speculators. They’re placing a wager on the direction that an equity’s price will take. As some may term it, gambling or “betting,” this is a sure-fire method to lose money. As a result, instead of putting your money at risk by trading stocks, consider making an investment.
Investors face the chance of losing money when they invest. Take this into consideration and be aware of several of the ways you can take a loss as a do-it-yourself investor. The good news is that you have some degree of influence over most of these factors. Make sure you’re actually investing in the share market and not just speculating. By using low-cost, commission-free index funds instead of more expensive active funds, you can reduce your costs significantly. With an investor position paper and a personal investing plan, you can avoid herd mentality. You should also know how much risk you are willing to take as an investor.