Most people I know are invested in the stock market, but unfortunately, their returns haven’t been too attractive. Most have shared with me that they aren’t too happy about their stock market endeavors based on actions they’ve taken. As it goes, behind such actions are actually thoughts and beliefs that dictate behavior.
So why the subpar investment returns?
Reasons Why We Don’t Make Money In The Stock Market
Here are some thoughts we may be harboring that could be limiting our investments’ potential:
We’re much too nervous about the stock market. Some folks believe that putting money in the stock market is a crap shoot. Many people tell me that they find the stock market intimidating and a place to “lose their shirt”. They’ve argued with me that it’s like a casino and would prefer to put their money in very conservative investments. But if our risk tolerance is low, then unfortunately, we won’t be able to participate in any form of investment growth through stocks.
We’re not diversified enough. This is probably the most common issue I’ve come across with friends and relatives. People pick up on someone’s stock tip, read up a little on the stock, then proceed to buy. Before long, they have a portfolio made up of random stock picks that carry a lot of unnecessary risk.
We compartmentalize. Some of us may tend to ignore the big picture so that we build a portfolio that isn’t properly optimized. It’s as if various parts of the portfolio are treated separately, which then results in lackluster overall returns. An example that demonstrates such compartmentalization: a portfolio with 10% in aggressive individual stocks but 90% cash.
We want to beat the market. This is one of the most common things I’ve heard at the proverbial office cooler. There’s just been no evidence that anyone can beat the market consistently (long-term). To me, “beating the market” sounds like the quest for the fountain of youth. If we’re lucky enough to do it for a few years, then we’re just probably pretty lucky. If we could pull this off all the time, then the world would’ve heard of us already .
We find individual stocks enticing and everything else boring. That’s because funds are too “ho-hum” or unexciting. A cold shower portfolio of boring funds just isn’t charged or sexy enough for some investors. Their definition of making money in the market involves double digit gains in a few months’ time, or involves a shot in the stratosphere by some sizzling stock (or sector). Often, I’ve been asked: “how can I make 25% in 3 to 6 months?” or something to that effect. I reply: “not without tremendous risk.”
We do a lot of market timing. I’ve mentioned before that I believed that not all timing is bad, but it certainly is a horrible idea for someone who isn’t highly experienced or informed in the fields of finance, stock market theory and analysis, or trading. But timing the market is something we may do since tinkering with our portfolios makes us feel like we are “earning” and deserving of whatever potentially higher returns we get. By compulsively and actively participating in stock market transactions, we may feel that we are in control and are directly responsible for the rewards that the market brings us, not realizing that most of the time, such activity just kills portfolio returns.
We think too highly of our abilities. I’ve seen lots of hubris among acquaintances who’ve proudly proclaimed how hard they’ve kicked the market’s arse in the past year. But then the next year, they’re less forthcoming, and when asked how their investments are doing, they change the subject (because they’ve underperformed the markets). In my 20′s, I was that person as well — then I got too tired of keeping score and decided to succumb to a passive portfolio. Well, I haven’t regretted my change of strategy!
After realizing I’d been committing a lot of these mistakes as a young investor, I took to studying the markets further and learning about investing and finance. I found that by taking a look back at my past behavior (and not just my investment performance), I was able to change previous thoughts and beliefs that were detrimental to my investing progress.
Other Resources: 10 Common Investing Mistakes or Just Personal Choices?
The Silicon Valley Blogger (SVB for short) is behind the The Digerati Life, a blog that covers personal finance, business, investment and real estate topics along with the occasional Silicon Valley tech story sprinkled in. SVB is a married mother of two young kids who juggles a nine to five job in the IT industry along with raising a family and various entrepreneurial pursuits.