The world of investing can be quite complex and, sometimes, quite unforgiving. According to eToro, a prominent trading platform with over 27 million active users, nearly 80% of their investors reportedly lost money over the last year. Even in the UK, the Financial Conduct Authority mandates brokers to disclose the percentage of users losing money on their platforms, which ranges anywhere between 69% to 84%. Given these figures, how do we ensure we land on the right side of these stats? Today, we delve into the four common ways investors lose money and how to avoid them.
Mistake 1: Buying High and Selling Low
The first and perhaps most common mistake investors make is buying high and selling low. Often triggered by fear during market downturns, this strategy can lead to substantial losses. A clear example is from my personal investing journey. Starting in January 2022, I decided to invest $5 daily into stocks and Ethereum cryptocurrency. After a year, I found myself $63.35 down in total return. However, instead of panic selling and locking in my losses, I held on. Today, my total return is positive at $233. This proves that you only really lose money when you decide to sell at a loss.
Mistake 2: Trading on Margin
Margin trading is the second pitfall for investors. Margin is essentially borrowed money, used to make an investment. While it can amplify gains, it can also magnify losses. If you borrow $100,000 to buy Tesla shares hoping for a substantial profit but instead the price drops, you lose your investment and still owe the brokerage $100,000. Therefore, for less experienced investors, it is safer to invest only your own hard-earned money.
Mistake 3: Overreliance on Savings Accounts
The third common mistake is over-reliance on savings accounts. While having an emergency fund is important, investing all your money in a savings account can lead to a negative real return due to inflation. Even if your account yields 3-4% interest annually, inflation at 5-7% effectively reduces the purchasing power of your money.
Mistake 4: Overlooking Fees
Finally, overlooking fees is another way investors lose money. Even with the proliferation of commission-free trading, investors need to be aware of hidden costs, such as expense ratios in ETFs. Ideally, your ETFs should have an expense ratio of less than 0.35%.
By being aware of these common pitfalls, investors can devise a strategy to not only protect their hard-earned money but also help it grow. Remember, the goal of investing is not to get rich quickly but to build wealth sustainably over a long period of time.