While investing in financial markets over the long-term is an excellent path to wealth, it’s not unusual to experience occasional losses as investment values go up and down. So if the markets go up over time, why is it that most investors lose money in the stock market?
- People lose money in the markets because they don’t understand economic and investment market cycles.
- People lose money in the markets because they let their emotions drive their investing.
- People lose money in the markets because they think investing is a get-rich-quick scheme.
Some people will claim that it is related to lack of skills, poor risk management, poor selection of strategies etc. But the simple fact is that it is mostly related to human psychology and human emotions
Still need a proof?
Fidelity Investments conducted a study on their Magellan fund from 1977-1990, during Peter Lynch’s tenure. His average annual return during this period was 29%. This is a remarkable return over the 13 year period. Given all that, you would expect that the investors in his fund made substantial returns over that period. However, what Fidelity Investments found in their study was shocking. The average investor in the fund actually lost money.
How is it possible?
Lynch himself pointed out a fly in the ointment. When he would have a setback, for example, the money would flow out of the fund through redemptions. Then when he got back on track it would flow back in, having missed the recovery.
This isn't about trading skills. The only skill those investors needed was to stick around. But what they did basically was "buy high sell low".
The main reasons for the poor performance of individual investors are:
- Human Psychology:
- Performance chasing:
- Casino Investing:
- The “me too” lemming investment strategy:
- Fear and Greed Investing:
A recent Dalbar study showed how investors are their own worst enemy. From 1997 through 2016, the average active stock market investor earned 3.98 percent annually, while the S&P 500 index returned 10.16 percent in returns. The reasons are simple: Investors try to outsmart the markets by practicing frequent buying and selling in an attempt to make superior gains.
Again, if anybody still needed proof that 90% of success in investing comes from human psychology, Fidelity and Dalbar studies provided that proof.
Here is some advice from Barbara:
- To avoid losing money during a market-wide drop, your best bet is to just sit tight and wait for your investments to rebound.
- To avoid losing money in the markets, don’t follow the crowd and don’t buy into overvalued assets. Instead, create a sensible investment plan, and follow it.
- Don't follow the outrageous claims of penny stock and day-trading strategies.
Similar behavior applies to trading services as well. As soon as a few losing trades and/or a drawdown of any kind occurs, some members hit the eject button and continue in their search for the Holy Grail strategy that always wins. They often come back after the next winning streak, missing the recovery.
Isn't it the very definition of "Buy High, Sell Low"?
Barbara A. Friedberg's final advice:
To avoid losing money in the markets, tune out the outlandish investment pitches and the promises of riches. As in the fable of the Tortoise and the Hare, a “slow and steady” strategy will win out: Avoid the glamorous “can’t miss” pitches and strategies, and instead stick with proven investment approaches for the long term. Though you might lose a bit in the short-term, ultimately the slow-and-steady approach will win the financial race.
Drawdowns are a fact of life for a trader. They happen. Big Drawdowns Are Part Of The Game.
Apple, Amazon, Microsoft and Alphabet…
- All among the largest and most revered companies in the world.
- All have returned unfathomable amounts to their shareholders.
- All have experienced periods of tremendous adversity with large drawdowns
Apple investors from the IPO would experience two separate 82% drawdowns. Amazon experienced a 94% drawdown. Microsoft largest drawdown in history occurred over a 10 year period, a 70% decline from 1999 through 2009. Google had a 65% decline from 2007 through 2008.
If you sold those amazing stocks during the drawdowns, you would miss their incredible gains.
Conclusion
There will be bad days and bad weeks and bad months, and periodically even a bad year. Focus on following your trading plan not the short term results of it. Robust strategies are profitable in the long term time frame.
Please do not become part of the next Dalbar statistics. If you found a solid strategy, try to stick around.
What Is SteadyOptions?
Full Trading Plan
Complete Portfolio Approach
Diversified Options Strategies
Exclusive Community Forum
Steady And Consistent Gains
High Quality Education
Risk Management, Portfolio Size
Performance based on real fills
Non-directional Options Strategies
10-15 trade Ideas Per Month
Targets 5-7% Monthly Net Return
Recent Articles
Articles
Pricing Models and Volatility Problems
Most traders are aware of the volatility-related problem with the best-known option pricing model, Black-Scholes. The assumption under this model is that volatility remains constant over the entire remaining life of the option.
By Michael C. Thomsett, August 16
- Added byMichael C. Thomsett
- August 16
Option Arbitrage Risks
Options traders dealing in arbitrage might not appreciate the forms of risk they face. The typical arbitrage position is found in synthetic long or short stock. In these positions, the combined options act exactly like the underlying. This creates the arbitrage.
By Michael C. Thomsett, August 7
- Added byMichael C. Thomsett
- August 7
Why Haven't You Started Investing Yet?
You are probably aware that investment opportunities are great for building wealth. Whether you opt for stocks and shares, precious metals, forex trading, or something else besides, you could afford yourself financial freedom. But if you haven't dipped your toes into the world of investing yet, we have to ask ourselves why.
By Kim, August 7
- Added byKim
- August 7
Historical Drawdowns for Global Equity Portfolios
Globally diversified equity portfolios typically hold thousands of stocks across dozens of countries. This degree of diversification minimizes the risk of a single company, country, or sector. Because of this diversification, investors should be cautious about confusing temporary declines with permanent loss of capital like with single stocks.
By Jesse, August 6
- Added byJesse
- August 6
Types of Volatility
Are most options traders aware of five different types of volatility? Probably not. Most only deal with two types, historical and implied. All five types (historical, implied, future, forecast and seasonal), deserve some explanation and study.
By Michael C. Thomsett, August 1
- Added byMichael C. Thomsett
- August 1
The Performance Gap Between Large Growth and Small Value Stocks
Academic research suggests there are differences in expected returns among stocks over the long-term. Small companies with low fundamental valuations (Small Cap Value) have higher expected returns than big companies with high valuations (Large Cap Growth).
By Jesse, July 21
- Added byJesse
- July 21
How New Traders Can Use Trade Psychology To Succeed
People have been trying to figure out just what makes humans tick for hundreds of years. In some respects, we’ve come a long way, in others, we’ve barely scratched the surface. Like it or not, many industries take advantage of this knowledge to influence our behaviour and buying patterns.
- Added byKim
- July 21
A Reliable Reversal Signal
Options traders struggle constantly with the quest for reliable
By Michael C. Thomsett, July 20
- Added byMichael C. Thomsett
- July 20
Premium at Risk
Should options traders consider “premium at risk” when entering strategies? Most traders focus on calculated maximum profit or loss and breakeven price levels. But inefficiencies in option behavior, especially when close to expiration, make these basic calculations limited in value, and at times misleading.
By Michael C. Thomsett, July 13
- Added byMichael C. Thomsett
- July 13
Diversified Leveraged Anchor Performance
In our continued efforts to improve the Anchor strategy, in April of this year we began tracking a Diversified Leveraged Anchor strategy, under the theory that, over time, a diversified portfolio performs better than an undiversified portfolio in numerous metrics. Not only does overall performance tend to increase, but volatility and drawdowns tend to decrease: