How Investors Lose Money

Updated: March 10, 2020

Have you heard of the Investor’s Dilemma? It’s an interesting concept which tells how most investors lose money. Read on and I’ll tell you all about it; then check if you’re committing these grave investing mistakes.

The Investor’s Dilemma is a story.

It narrates the typical process that an inexperienced investor go through, and the decisions that results from those thoughts. Below is an overview illustration of the complete journey.

Fear of the Future
The investor’s dilemma all starts with the fear that you won’t have enough money in the future. From this fear, you realize the need and the importance of investing.

You gather your finances and then start to look for investments.

Forecast and Predict
Everyone wants to make the most money out of their investments, and thus you ask, “What is the best investment out there?”

The answer comes to you in waves. First, you’ll hear about the stock market being the best place to invest. Then some will say, mutual funds are better. And others still, will try to convince you that real estate is the way to go.

So which one is the best? You decide that past performance is the key.

Track Record Investing
You begin looking into historical data, hoping that this will give you the decisive information you need. But instead of achieving clarity, you get more confused.

One performed better in the past five years, but another one has the highest earnings from the past three years. And all the while, you keep on reading that past returns is not a guarantee of future performance.

Analysis paralysis comes.

Information Overload
Too many choices, too many data, too many possibilities. It soon takes a toll on you.

You fear that you’re missing out on making money because it’s taking you too long to decide where to invest. On the other hand, you fear that it may not be the best time to invest because you hear that the market might fall soon.

You decide on a new strategy…

Emotion Based Decisions
Which investment are people buying? What’s the advise of my favorite investment guru? Where is my rich uncle invested?

There must be a reason why people are choosing this investment, so I’m buying it too. That analyst is an expert, so I should trust his advise. My uncle won’t become rich if he isn’t good with money, so might as well just copy what he does.

You take the leap, and finally invest.

Breaking The Rules
You’ve come a long way to reach this point. You feel good about yourself for investing, and you proudly look at your portfolio, which you’ve managed to create by yourself.

After going through all those steps, you decide it’s now time to rest, sit back and watch your money grow into millions.

Then the market goes down, and fear sets in.

Performance Losses
Why is my investment losing value? Did I make a wrong decision? This is too painful, and I must stop the bleeding.

Those are the thoughts that begin to haunt you at night. And you feel that the only way you’ll get some peace of mind is to redeem your investments, sell your shares – liquidate at a loss.

When all the dust settles, you begin to ask, “What did I do wrong?”

The Things You Did Wrong

1. You invested without a specific objective. You don’t invest just because you want more money in the future. There has to be a goal.

2. You looked for the best investment based on income potential. You should always go instead for the investment that’s best-suited for your financial goals.

3. You blindly followed the advise of other people. Each investment decision should be based on a logical and sound consideration of your personal situation.

4. You did not diversify your portfolio. Or even if you did, you failed to manage your risk and rebalance your portfolio as needed.

How To Avoid Losing Money In Your Investments

1. Discover your money’s true purpose.

2. Develop and follow a well-designed investment philosophy.

3. Monitor your investment behavior and assure that your actions are consistent with your true purpose and investment philosophy.

If you think you’re currently experiencing the Investor’s Dilemma. I highly suggest that you take some time to think about what you are doing wrong. And immediately take action to correct it by following the three-step solution above.

Work Cited:
Investor’s Dilemma by Wealth Renovators LLC

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Photo credits: Wealth Renovators and andrea_joana