People lose money in stock markets more because of their own mistakes,
than any market turmoil and other such things.
For instance, it has generally been observed that equity investments
are often guided by greed and investors seldom do their homework
before putting their hard-earned money in stock markets.
Besides, they often resort to speculation and keep 'timing the
market', which has not proven to be a great strategy.
Lots of investors also presume that the market will only go northwards
and the bull run will never end. But that never happens. Not in any
market of the world. But that's how it is.
1. Guided by greed
Many investors have been losing money in stock markets owing to their
inability to control greed and fear. The lure of quick wealth is
difficult to resist, particularly in a bull market. Greed augments
when investors hear stories of fabulous returns being made in the
stock market in a short period of time and, thus, lose their hard-
earned money in many cases.
2. Following herd mentality
Following herd mentality is another reason for the investors' losses.
"It has been witnessed that the typical buyer's decision is heavily
influenced by the actions of his acquaintances, neighbours or
relatives. So, if everybody around is investing in a particular stock,
the tendency for potential investors is to do the same. But this
strategy may backfire in the long run," says Ashish Kapur, CEO, Invest
Shoppe India Ltd.
3. Resorting to speculation
Investors also face losses because they speculate and buy shares of
unknown companies. They should, therefore, avoid relying on random
tips and go for long-term gains only.
4. Lack of research
Proper research should be undertaken before investing in stocks. But
this is rarely done. Investors generally go by the name of a company
or the industry they belong to. But this is not the right way of
putting one's money into the stock market. "Therefore, if one doesn't
have time or temperament for studying the markets, one should always
take the help of a suitable financial advisor," says Kapur.
5. Creating leveraged positions
Many investors suffer from creating heavy positions in the futures
segment without really understanding the risks involved. Instead of
creating wealth, however, these investors burn their fingers very
badly in case the sentiment in the market reverses.
6. Panic selling
In a bear market, investors panic and sell their shares at rock bottom
prices. Trading on the bourses was suspended on May 17, 2004, May 18,
2006 and recently on January 22, 2008. Investors who had taken
speculative positions lost heavily when blood was on the street. Even
investors who had the capacity to hold on to their investments, lost
faith in the markets and sold their investments in a hurry, thus
incurring heavy losses.
7. Timing the market
Many investors try to time the market. But this has not proven to be a
great strategy. Historically, in fact, it has been witnessed that even
great bull runs have shown bouts of panic moments. The volatility
witnessed in the markets has inevitably made investors lose money
despite the great bull run. Therefore, only prudent investors who put
in money systematically, in the right shares and hold on to their
investments patiently, have made outstanding returns. So it's not
'timing the market', but 'time in the market' which creates wealth.
Hence, it is prudent to have patience and always keep a long-term
broad picture in mind.
8. Putting all eggs in one basket
Another mistake which investors generally make is non-diversification
of their portfolio. They generally put all their money in limited and
favourite stocks which are in momentum. So, investors should diversify
their portfolio across industries and size of the companies. Also, it
is important to diversify across asset classes – equities, real
estate, bonds, commodities, cash etc.
9. Avoiding financial planning
Investors also do not apply financial planning practices in their
investment approach. They should follow an asset allocation model and
invest only in long-term funds in the equity markets. They should also
keep rebalancing their overall portfolio from time to time to keep
their exposure to equity markets at the desired ratio of the total
portfolio.
10. No monitoring of portfolio
We are living in a global village. Any important event happening in
any part of the world has an impact on our financial markets. Hence,
we need to constantly monitor our portfolio and keep affecting the
desired changes in it. If one can't review one's portfolio due to time-
constraint or lack of knowledge, they should take the help of a
financial advisor.
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