A lot of people lose money in the share market or underperform a standard benchmark index such as the S&P/ ASX200 (ASX: XJO).
In fact when we consider that the index represents the average of all investors returns we can see that about half its participants will be behind and half in front. Many of those behind will probably be losing capital regularly given the market on average only returns in the high-single to low-double digits per year.
However, I honestly believe that following a few simple rules can help absolutely anyone who’s struggling to beat the benchmark or losing money.
1) If you’re booking regular losses on stocks the truth is it’s almost certain you don’t know what you’re doing.
As such your weakness is probably an overconfidence in your abilities.
For example most people will tell you that they’re better than the average driver on the roads.
Indeed you yourself will probably be convinced of it. However, of course 50% of people must be worse than average.
As such if the evidence suggests you cannot beat the index for any number of reasons, I’d strongly suggest taking credible professional advice, or buying a low-fee exchange traded index fund such as those offered by Vanguard or BlackRock. Otherwise you’re just wasting your money.
2) Sticking with the overconfidence theme. Some investors believe themselves to be so smart that they can identify just one business so great that all they need to do is invest all of their funds into it as the stock is guaranteed to go up.
Putting all your eggs into one basket is another amateur investing mistake common to big heads and blowhards. But remember every stock carries a lot of risk due to the capitalist system that means high profit margins attract competition.
Moreover, the more popular a company the more likely its shares are to be overvalued. A couple of companies that are hot right now include Wistech Global Ltd (ASX: WTC) and Afterpay Touch Group Ltd (ASX: APT), but that doesn’t mean they’re good investments today.
3) Buying gold – not everyone will agree with this, but ever since the GFC in particular a lot of people have blundered in buying gold shares or derivatives in an anticipation of a coming market crash.
Recently we’ve seen the likes of North Korea, Brexit, Iran, and the election of President Trump all offered as reasons to go defensive while risk assets have in fact kept on going higher.
Legendary Wall Street investor Peter Lynch is reported to have once said something along the lines of “more money has been lost by people trying to predict a correction, than in the actual corrections themselves”. And he’s probably right as the opportunity cost of sitting out rising markets is a big one.
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Tom Richardson owns shares of AFTERPAY T FPO and WiseTech Global.
You can find Tom on Twitter @tommyr345
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of WiseTech Global. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.