Deploying a bad strategy is a sure way to consistently lose money
in the stock market, or lose in just about everything else in life.
Ideally, people should use strategies that keep them successful in the
long run.
Unfortunately when it comes to investing, retail investors are more
likely to embrace “losing strategies”. Here are 4 classic examples that
we can think off.
# 1 They Love Being “Active”
It’s a well known fact that the more active you are in the stock
market buying and selling stocks, the more skilful you better be.
Think about it this way. If most studies have already shown that active fund managers do not beat passively managed funds,
despite the presence of experienced fund managers, why do retail
investors still think they can outperform the market by actively
managing their investments? It makes absolutely no sense. A retail
investor knows less than a professional fund manager, and is unlikely to
be able to pick the right stocks at the right time. Why should they be
able to outperform the market when fund manager are unable to do so.
Keep it simple for yourself. Look at passively managed funds or ETFs
and stick to them. If you want to buy individual stocks, keep it as a
small percentage of your overall portfolio.
# 2 They Enjoy Following Trends
Many people are trend followers in life. Be it buying the latest
iPhone 7, watching the latest Korean drama, DOTS, or going to the latest shopping mall that TheSmartLocal wrote about.
While it costs you nothing to follow a trend when it comes to buying
gadgets, watching TV shows or visiting the shopping malls, the same
cannot be said for investing.
When a stock becomes hot, demand would exceed supply. More investors
start looking to buy the stocks and there are not enough willing
sellers, thus pushing prices up. That in turn brings more attention to
the stock, which leads to further price increase. The vicious cycle
continues.
Following the latest trend when it comes to investing will always
cost you more. Hence, it’s better to invest based on your own knowledge
and research, rather than to rely and overpay for stocks based on what
other people are talking about.
# 3 They Sell Winners And Hold On To Losers
You buy a stock. It goes up by 15%. You are delighted and cash
out your profit. The stock continues to increase. You tell yourself you
will re-buy it when it returns to the original price. That never
happens.
You buy a stock. It goes down by 15%. You decide to hold on to it
in the hopes that it will bounce back so that you can recoup your
initial investment. It continues to drop. You hold on to it.
The scenarios above are examples of how retail investors
sub-consciously employ sure-lose strategies without even realising it.
Instead of holding on to winning stocks and letting their profits run,
while cutting their losses quick on losing stocks, they do the exact
opposite instead, thus ensuring that they will inevitably lose money on a
long enough timeline.
# 4 They Look At Returns, Instead Of Risks.
Expected higher returns always translate into higher risk. That much
is certain. As investors, we cannot expect high returns without taking
higher risk.
Instead of focusing on higher returns that come (automatically) with
higher risks, retail investors should focus on risk, which doesn’t
necessarily translate into optimised returns. Investors should be asking
themselves if the risk they are taking on is too high for the returns
they expect to get.
If an investor is unable to ascertain the risks, then they would be
better off passing up on the investment opportunity and to focus instead
of investments that they are more familiar with.
Inexperienced investors tend to be put too much emphasise on returns,
while ignoring the more important aspect of risk. If a high-risk
investment pans out, it gives them further confidence that they were
right, and encourages them to put in more money. Ultimately when their
investment turns sour, they blame it on the product rather than to
recognise that it was a lack of risk management that led to the loss.
Are You Sabotaging Your Own Investment?
It’s one thing to not have a great investment strategy, and to earn
lower returns that you could have earned had your strategy been more
refined.
It’s a whole different thing when your investment strategy is
designed for eventual failure. If any of the investment “strategies”
above sound familiar to what you are doing, or someone whom you know, do
yourself and your friends a favour by correcting them.
Are you or your friends looking to learn more about how you can
choose winning stocks? Or how to invest successfully? If you are, join
us in our latest installment of DollarsAndSense 90-min Series: Guide to Choosing Winning Stocks,
as we partner with industry experts to bring you the basics of what you
need to know about stock investing in a bite-sized, no nonsense way.
How can you choose winning stocks in Singapore? Join us on 16 November in our next 90-minute series: Guide To Choosing Winning Stocks, as we discuss some of the key elements to look at when choosing stocks to invest in. Subscribe to our free e-newsletter to receive exclusive content and promotions that are not available on our website. Follow us on Instagram @DNSsingapore to get daily dose of finance inspirations through photos.
Ref:http://dollarsandsense.sg/4-losing-strategies-that-inexperienced-retail-investors-love-embracing/
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