Here are what you need to know about why people lose money in the stock market and how to bounce back from the loss.
People lose money in the markets because they don’t understand economic and investment market cycles.
Business and economic cycles expand and decline. The boom cycles are fostered by a growing economy, expanding employment, and various other economic factors. As inflation creeps up, prices rise, and GDP growth slows, so too does the stock market decline in value. To avoid losing money during a market-wide drop, your best bet is to just sit tight and wait for your investments to rebound.
People lose money in the markets because they let their emotions drive their investing.
The marriage of behavioral psychology and behavioral economics — explains how investors make poor decisions. Understanding basic behavioral finance concepts can save you a lot in losses during your investment lifetime.
In investing, herd mentality is one of the worst behavioral finance mistakes, and plays out when you follow the investing crowd. Herding in investing occurs when you follow the group, without evaluating current information.
In the late 1990s venture capitalists and individual investors were pouring money into internet dot com companies, driving their values sky high. Most of these companies lacked fundamental financial stability. Investors, afraid of missing out, continued to follow the herd with their investment dollars.
To avoid losing money in the markets, don’t follow the crowd and don’t buy into overvalued assets. Instead, create a sensible investment plan, and follow it.
People lose money in the markets because they think investing is a get-rich-quick scheme.
You can quickly lose your investment dollars by heeding the outrageous claims of Penny stock and day-trading strategies.
To avoid losing money in the markets, tune out the outlandish investment pitches and the promises of riches. As in the fable of the Tortoise and the Hare, a “slow and steady” strategy will win out: Avoid the glamorous “can’t miss” pitches and strategies, and instead stick with proven investment approaches for the long term. Though you might lose a bit in the short-term, ultimately the slow-and-steady approach will win the financial race.
Credit: The Balance