Why Do People Lose Money in Equities? –11 Mistakes to Avoid

Equity as an asset class is by far the top-performing asset classes for long-term investments. Over time, equities generate higher returns than other asset classes such as bonds, cash, and real estate. While equities can be volatile in the short term, subject to market fluctuations, they provide investors with the most attractive returns over the long term. But that doesn't mean investors don't lose money in it. Despite potentially higher returns, equities are subject to market volatility brought on by economic conditions, industry trends, and geopolitical events. In fact, stock market crashes and downturns are not uncommon, and investors who are not prepared to weather these events will suffer significant losses. Investors tend to lose money in the stock market by making the mistakes listed below.

Investing in equity is one of the most boring tasks. If you enjoy investing, then probably you are not making any money."

Mimi Partha Sarathy
MD Sinhasi Consultants

 

 

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1. Buying on Euphoria

Investors can get swept up in the hype and euphoria of the stock market during bullish times, leading to risky buying decisions. Market overvaluation during this period can cause time & price corrections or crashes, resulting in significant losses. It's important to maintain a long-term perspective and avoid getting caught up in short-term movements. Conduct research, diversify portfolios, and stick to a solid investment strategy to make informed decisions and weather market volatility.

2. Selling on Fear

Euphoria and Fear go side by side and it's important to keep in mind that there will always be pundits on television predicting doom and gloom – usually after the markets have already experienced a significant drop. The reality is that it's extremely difficult to forecast short-term market movements. Selling in panic after a decline to time the market's reversal is unwise, as timing it accurately is unlikely, causing missed gains and lost opportunities. Prudently manage risk with a well-diversified portfolio of stocks and other assets and a long-term perspective.

3. Not Being Patient

Success in equity investment requires patience, as the market may not align with individual preferences and expectations, and prices can remain low despite economic improvement. Mutual fund investments may also perform poorly against market trends. Great ideas and businesses take time to establish, so patience is necessary to maximize benefits. Trading or speculating on stocks alone does not yield optimal returns.

4. Excessive Churning

Excessive portfolio churning can result from impatience. It's important to trust in a fund's strategy and investment decisions and avoid impulsive exits, which may cause missed gains. Rushing to move in and out of investments based on perceived "better" opportunities is unwise. Stick to a well-informed investment plan and resist making impulsive decisions based on short-term market movements. Fewer investment decisions can reduce the probability of making mistakes.

5. Buying for one Reason & Selling for Another

To invest in stocks, create an investment plan that aligns with your long-term financial goals and document your thesis and rationale. Avoid impulsive decision-making when adjusting your investment strategy due to changing circumstances. Don't sell stocks based on short-term dips in price or news headlines without considering the company's long-term potential or researching underlying reasons for performance.

6. Favoring the Current Flavor

Different pockets of equity markets perform differently. Not all sectors/ themes/ industries perform at the same time. Each category follows a cycle whether predictable/ unpredictable. The trending flavor attracts investors easily. For e.g. trend in IT sector, trend in ESG investment, momentum stocks etc. Usually, investors tend to follow such trending flavors with an expectation of earning quick returns. 

But it has two key drawbacks –

1. The trending flavor is trending because it has already rallied, and you may catch it at the peak.
2. Deviations from your long-term investment plans as there is constant churning of the portfolio.

7. Following the Top Performer

While it's natural to want to invest in top-rated or top-performing Funds, it's essential to remember that past performance is not necessarily indicative of future success. It's not uncommon for Mutual Funds to experience fluctuations in performance, and a top-performing fund in one period may not continue to perform as well in the future.

All funds have their own performance cycle and base effect plays a crucial role in the performance of any fund. Often, the top performer suffers the impact of a higher base in its future performance. The top performer today would have been underperforming 3-5 years back and likely to underperform 3-5 years from now.

8. Looking for Tips

The term "TIP" has been widely used in the stock market for a long time. In the past, individuals used to rely on tips from friends, family, and colleagues to make investment decisions. Nowadays, with the advancement of digital technology, people often seek advice from social media influencers and groups.

However, blindly investing your hard-earned money based on such tips, without conducting proper research or seeking advice from a financial advisor, can put your capital at risk. It is common for people to invest in penny stocks and expect the prices to skyrocket, only to be disappointed.

It is crucial to perform due diligence and research before investing in any stocks/MFs. Alternatively, it is advisable to approach a financial advisor to make informed investment decisions.

9. Expecting Quick & Easy Money in Short-term

Equity asset class has the potential to generate superior return and is by far one of the top performing asset classes in the long term. And this is tempting for any investors, especially the newer ones. Often, new investors coming to the stock market expect a superior return and that so in a short period – within a year or two and more often, such expectations get punished by the market itself. Therefore, it is important to understand that equity investment needs Time and Patience to generate reasonable return.

10. Randomness

Investing randomly in the equity market can have negative consequences on the overall return of an investment. Such actions can lead to investing during euphoric periods and experiencing painful periods for a longer time. It is important to remain disciplined in your investment plan and have a systematic way of investing to take advantage of value averaging. By investing a fixed amount at regular intervals, investors can reduce the impact of market volatility and potentially increase their returns over the long term.

11. Investing without a Financial Plan

Even if ALL the above mistakes are dealt with,investing without a financial plan is like travelling without a destination. Planning the cashflow requirements is the most important part of any investment plan and it sets the time horizon of every investment instrument.

If cashflow is required, say in 3 years and not planned properly,you may be forced to sell in a bearish market leading to loss of capital. Thus, it is highly advisable that all the investments should be implemented with a predefined financial plan.