The average investor consistently underperforms the market. In this video, I’ll give you 5 reasons why the average investor either underperforms the market or lose money when investing.
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0:00 – Introduction
A study by JPMorgan and CPF Investment scheme found that found that the average investor are very bad at investing.
0:55 – Not Treating Buying Stocks As Buying Into Business
Most investors only see the stock as the ticker symbol, stock price and financial ratios. Forget about the price, if you can see hints and signs that the company will do well, you will know that the price will automatically go up in the long term. With Google and YouTube, it is not hard to find out about the company. Treat buying the stock of the company as buying a part of the company itself, find out whether your money has the potential to grow in this company.
2:42 – Trying To Time The Market
Many investors think they are god of stocks and think that they can time the market. There are tons of research out there that proves time in the market will perform much better than timing the market. If you have bad timing, you would underperform someone who is doing dollar cost average. The more things you try to do, the lesser you will earn.
A research by JP Morgan found this, from 1998 to 2018, if you have just held on no matter what, you would be earning 5.62% annualized return. But if you missed just 10 best days out of that 20 years, just 10 days, your return will already dropped by half. Missed 20 best days? Your returns will be in negative territory.
5:05 – Not Thinking Long Term
When many investors invest, they do not think long term. Instead, they want fast profit. If you want to make money safely, go for the slow and steady method. As long as you buy and hold your stocks, over the long term, a good company’s stock will only go up. In fact, it was found out that the S&P500 has never once delivered a negative returns over a 20 year period. This shows that the longer we invest, the lower our chances of losing money.
As Benjamin Graham once said “In the short run, the market is a voting machine, but in the long run it is a weighing machine”
6:52 – Over-Investing Money
Never ever invest money that you need in the short term. By short term i mean anywhere within 10 years. No matter how safe you think an investment is, there’s always a risk to it. The market could just crash and burn tomorrow for all we know. When they lose their jobs, or their business are failing, which is often the case when times are bad, like a recession, they would be forced to sell off their investments at a huge lost.
A way to counter this is to always have 6 to 12 months of emergency funds put aside. That way, you won’t be forced to sell away your investments at a loss.
8:20 – Using Emotions To Invest
If the stock went up by 10-20%, ask yourself this, am I comfortable holding this stock at this price for the next 10 years? Buy only if the answer is yes
You certainly wouldn’t run away from a discount at the shopping mall, so why would you run away from discounts in the stock market.
9:16 – How To Avoid Using Emotions To Invest
Here’s a few tips to invest without using emotions:
1. Understand companies that you are investing in. A good company will always go up.
2. Have an end goal in mind. My goal is to achieve financial freedom in the next 10 years. And that means I can’t make risky investing decisions. But instead, I would have an annual target to hit, which is by dollar cost averaging, and let the market do it’s work.
3. Don’t look at the stock market every day. It will wreck your emotions.
4. If you cannot handle volatility, instead of investing in individual stocks, invest in index funds or ETFs instead, like ARK ETFs, SXLK, QQQ or even S&P500 ETF.