Investing is absolutely booming at the moment. People are signing up for trading apps in their thousands and putting their hard earned capital on the line.
But the sad truth is the majority are going to LOSE money.
Some people will only lose a small amount of money but some people are going to lose everything they own in the stock market.
Why?
Because they are playing it like a game of Roulette.
I’m a big advocate of investing in stocks and shares but without some core principles in place the market becomes a casino… and one with no limits.
If you’re losing money in the stock market or you want to learn how to avoid losing money then this post is for you.
I want to make you aware of what’s happening out there and hopefully help you stop losing money.
Is Everyone Losing Money In The Market?
The short answer is no but there’s a big IF in play here… if you are actively trading in and out of positions on a regular basis then data suggests you’re overwhelmingly likely to be a loser.
Here’s the proof traders are losing:
Day Trading For A Living? Brazillian study showing 97% of individuals who traded for more than 300 days lost money, of those who made money 1.1% earned more than minimum wage and only 0.5% made more than an cashier in a Bank would earn.
Ref: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3423101
The Cross-Section of Speculator Skill Evidence from Day Trading – A study of 360,000 traders in Taiwan which shows only 15% are able to turn a profit after the costs associated with trading are deducted from returns.
Ref: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3423101
The Profitability of Day Traders – 64.2% of traders lost money and only one in five managed to make more than $5,000.
Ref: https://www.tandfonline.com/doi/abs/10.2469/faj.v59.n6.2578
How Profitable is Day-trading?: A Study on Day-trading in Korean Stock Market – Daily average return on traders across the study was -0.39% excluding trading fees rising to -0.89% when fees are factored in to the equation.
Ref: https://www.e-kjfs.org/upload/pdf/kjfs-2007-36-3-351.pdf
I’ll stop there with the proof but I could go on and on citing academic studies which show people who are day trading are overwhelmingly likely to be losing money.
Worryingly it appears a large amount of new interest in the stock market is from people using trading apps who are regularly buying and selling different companies.
You’ve only got to spend 10 minutes on YouTub or TickTok to see what I mean.
Even more worrying is the fact that some of the biggest online brokers in the UK (eToro for example) are allowing customers to trade CFDs and things have got so bad regulators have forced them into displaying disclaimers front and centre on their platforms.
‘CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.’
Check out the eToro homepage – you can’t miss the message.
How To Stop Losing Money In The Stock Market
If done with the correct approach investing in the stock market can be a great way to build wealth.
If you want to stop losing money investing the first thing you need to do is adopt a diversified long term buy and hold strategy and ditch the idea of buying and selling your positions on a regular basis.
NB: I’ve covered how to structure your portfolio in a previous post if you want to learn about diversity.
Short Term vs Long Term & Volatility
Here’s a graph of the S&P 500 index from 1981 to 2021:
What’s the single most important thing to notice?
The line goes up.
Obviously there are periods of time when you would have lost money, some sharp drops which would have been worrying but ultimately if you buy and hold, ignoring the present economic state, and look to the future history suggests you will make money.
History also shows that if you sell up your positions when the market falls you’ll end up missing the rebounds… again causing you to lose money.
The bottom line is you need to stay invested and take the rough with the smooth.
How To Stay Strong: 5 Tips For Staying Invested
It’s not easy to stay strong and hold your positions when the market turns against you or after you’ve listened to some guru take up a specific company that’s about to go to the moon.
But if you want to change your ways and make money from the market you’re going to have to be disciplined.
Here are some tips on how I’ve managed to do that:
- Learn and observe how volatility in the market works and what it looks like. Over even a short 6 month period of watching things go up and down you’ll become comfortable with it (it’s incredibly common) and you won’t panic when it happens.
- Treat money like it’s gone the second you’ve invested it. Detach yourself from the money. When you pay your mortgage you don’t think about where the money has gone and when house prices fall you don’t start panic selling your house do you?! It’s a long term investment and so is the stock market.
- Research managed funds and buy into them instead of managing your money yourself. Trust the fund manager to do a better job than you will (they are professionals after all).
- Stop obsessively checking how your investments are performing. Remove any investing apps from your phone and accept that you’re in it for the long haul so how things have done this day, week or month doesn’t really matter.
- Allocate a small percentage of your investing funds to personal stock picks. Right now, as you can see from my portfolio, I don’t do this but I know lots of investors do. Take 10% and allow yourself to invest that in companies you pick but no more.
Losing More Than You Can Afford?
Trading the stock market can quite quickly turn into an addiction, essentially a gambling addiction, and if you are losing more money than you can afford and think you might have a problem then help is available.
GamCare can give you free advice and guidance on how to deal with your problem.
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