5 reasons people lose money on the share market

Keen to invest in shares but heard stories of people losing their money? Glen James shared the 5 most common reasons people lose money on the share market. Check out the short my millennial money episode where Glen breaks it down:

#1 the daily pricing causes angst

Humans react more to hurt and pain, than joy and gain. I guess when we feel hurt, we want to stop it as soon as possible. When investing in the share market every single day you will know how much your asset is worth - you witness all the ups and downs. This is because it’s a fairly liquid asset (can be sold fast for example). While history tells us that the share market only increases over time, that doesn’t help when there is a pandemic, terrorist attack or other crisis causing a major correction and drop of maybe 10% over 2 days. So natural instinct after feeling this hurt is to stop it hurting so it can’t fall further and hurt more. You do not have this problem with investing in property as you are not getting a daily update of how much your property is worth (not a very liquid asset). The best way to get around this is to remove your share trading account app from your phone and do not check it every day. Out of sight, out of mind – right?

#2 they try and time the market and actively trade

Timing the market means that you in all of your wisdom know when to buy and when to sell and act accordingly. If you time the market you are foolishly admitting that you have more skill and knowledge than Warren Buffet. In fact, if you time the market all the science and research show that on balance you will lose money (refer to my first point). Speaking of Mr Buffet (the most successful investor in the world) he recommends using index funds only as you, with your aforementioned wisdom, will not be able to beat the market.

‘But I like to buy when there is a dip’. I think it’s totally fine if you wish to go shopping when there is a clear sale on – but this shouldn’t be your investing strategy as you will never be able to ‘time’ when the bottom of the dip is going to be. I would still be regularly investing on a monthly basis. In choppy times if there is a clear 3 or 6 month low, sure, you may put some excess funds in but don’t be deceived into thinking that you are sophisticated when it comes to investing. The old saying is ‘time in the market is better than timing the market’! When people sell when markets have dropped they lose their money because they cash out at the worst time and then they generally miss the upswing on the other side. Many people ‘cashed’ out after the Global Financial Crisis (GFC) and ‘lost half of their life savings’ and never re-invested. This cost many people thousands of dollars. When I hear the statement ‘my grandparents lost it all during the GFC’ I would almost guarantee that they sold at the worst time and didn’t have what I’ll mention in my next point . . .

#3 they have no strategy before investing

Investing is serious business, much like planning a holiday. If you just rock up to the airport on the day with your passport and bags and hope to book a flight at the counter, you’ll probably find it will cost you more than buying a few months out and you may even be disappointed if there are no seats for you. Many people do not take this approach as they have a strategy with their holiday long before it’s time to jet off. So why don’t we take our investing this seriously? I believe having an investing strategy should only occur once you have a sound financial house – you’re debt free, have your emergency fund in place and a spending plan that is working (basically living on less than you earn). If your financial life is haphazard, you’ll just end up withdrawing money from your investments and sometimes that will be when when the market is low. How often do you plant a tree in your garden and then decide to move it 4 weeks later? Probably never. You need to set your financial life up first (your garden) and then start investing (planting).

An example of a strategy that we all have is called superannuation. This money can’t generally be touched until we are over age 60 years old. This is the strategy – so we don’t need to worry about moving our superannuation investment option to cash if there is a bad time in the markets as it’s not part of the strategy to sell down until over age 60.

Another strategy example could be ‘I’m investing surplus income to build wealth for my future’. This strategy means that because your spending plan is in place, you’re debt free and established – you actually don’t need the money for the now. At the worst times in the financial markets, you don’t need to react as you don’t need the money anyway.

Because you have an emergency fund you do not have to draw down on your investments possibly at the worst time. This is also a reason why personal insurances are a benefit as part of your financial foundations.

#4 they lose sight of their strategy & goals

Many people have a strategy and goals but start to lose money when they lose track of the what and the why of their investing. This can be due to apathy in their financial life creeping in, the loss of a loved one or a midlife crisis type of scenario. When we lose track of what we are doing things start to drift. When we lose sight of the long-term, emotions can walk in and make us doing off-track things with our investments. Have you got a clear plan and do you check it semi-regularly? Are you surrounding yourself with like-minded people who will encourage you and keep you focused? Have you checked the pulse of your current strategy and goals to make sure they are still suited? If you think your goals may change and for example you were saving via investment (over 5 years) for a home deposit and you could actually buy a year sooner than expected, you could just stop investing and save cash for the remaining 12 months. It all comes down to strategy - but you have to check in and ensure you’re heading in the direction you want, and adjust as needed.

#5 they don’t understand enough before starting

People lose money on the stock market because they do not understand how shares work. You have got to get educated. If you had 1 share in Woolworths and you purchased this share for $44 your portfolio would be worth $44. If there was a market correction and the price of your 1 share decreased to $40, your portfolio would now be worth $40. Now all of a sudden did Woolworths suddenly stop getting customers and selling groceries? No, of course not – there is still an underlying quality company that is trading. It would still pay a dividend. You would only lose $4 if you sold that share when it dropped to $40. If you understand you still own a share in Woolworths, regardless of the price you still own a share in a quality company that is making a profit and paying you a dividend. You do not lose any ownership in the shares you own if the value drops. Remember – you’re an investor, building wealth – things take time to build. Don’t focus on getting rich – focus on building wealth.

Where to next?

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Read our 9 investing basics for beginners blog
Read our investing: what is an index fund? blog
Read about when & how to invest in shares