6 Reasons Why Most People Lose Money in the Stock Market (2024)

You’ve probably heard the statistic that 90% of people lose money in the stock market. Crazy, right? For something that supposedly “always goes up over time”, how do so many people lose money investing in stocks?

The answer is: it’s not the stock market’s fault. It’s our human emotions and actions that screw things up.

Being a successful investor isn’t about knowing and doing all the right things. It’s more about avoiding the common mistakes that backfire on us in meaningful ways. So, this post is going to cover some of those common missteps that people make causing them to lose money in the stock market. (We’ll also talk about how you can invest wisely to avoid the same fate).

1. Individual stock picking

The first reason people lose money in the stock market is because they try to hand-select individual stocks that they think will be winners. Whether it’s because they heard someone on CNBC recommend that stock or because they use the product, investing in individual stocks comes with real risk attached.

There are a few problems with the strategy:

  • First, the average person isn’t usually knowledgeable about how to value a business, or its stock price. Most folks buy stocks based largely on hunches.
  • Next, even if someone did know how to accurately evaluate a company, it is almost impossible to learn everything on an immediate and consistent basis. Publicly traded companies are complex machines, with thousands of moving parts and people that change each day.
  • Lastly, Investing in only one stock (or a small handful) is like putting all of your poker chips in on the first hand dealt to you. It doesn’t matter how good you are at poker (or how good you think your hand is), there is simply too much risk riding on variables that you can’t control.

Do this instead: Successful investors diversify. They use a modern innovation (index funds) to invest in a large collection of companies across different industries, locations, and sizes.

Our favorite Index funds track the S&P500 or Total Stock Market Index (like VTI, VTSAX, VOO, FSKAX, FXAIX, SPY). Owning stake in almost ALL the companies out there means you’ve actually picked ALL the winners (yes, you also own some loser companies, but there are more winners than losers.)

2. Having little or no patience

Humans naturally suffer from recency bias, which basically means we prioritize short-term thinking/events and ignore (or forget) long term probabilities.

This bias often causees us jump to conclusions, make impulse decisions, and constantly change our strategy. Ultimately, many people lose money in the stock market because they simply can’t wait long enough for meaningful profits to arrive.

History shows that the longer you remain invested (in diversified stocks) the less chance you have of losing money in the stock market. Wealth compounds over time, which only happens if you leave your investments untouched.

Here’s one of my favorite charts illustrating this point using rolling historical S&P500 data.

If you invest your money for 1 day, the chances of losing money are almost the same as a heads vs. tails coin flip.

But as you can see, the longer you leave your money invested, the lower likelihood you have of losing money. When you invest over the long term, you never lose.

The takeaway lessons here are:

a) to think long term (don’t worry about weekly or monthly market results) AND

b) once you invest money, leave it alone for as long as possible!

Related post: Investing for Beginners — A Complete Guide

3. Trying to time the market

The stock market is a volatile thing. It fluctuates up and down in value all day, every day. As humans, we get really excited when things are going up. It puts us in a happy, optimistic, buying mood. But when things go down, we get nervous, conservative, and become more likely to cut our losses and run.

As it turns out, these gut reactions are the exact OPPOSITE of what is good for making money as investors. We lose money because our emotions lead us to buy high and selling low, which is the antithesis of what we’re trying to achieve!

This kind of goes hand-in-hand with the point above about having patience and thinking long term. When the stock market is taking a beating over an extended period of time, it can be depressing and can mess with your emotions.

What can we do to avoid timing the market poorly? A technique called dollar cost averaging allows us to continue investing regularly despite what the market is doing. Most folks do this with a weekly paycheck deduction into their workplace retirement account (401k, 403b).

If you don’t have access to a workplace account, open up a Roth IRA and make regular automated monthly contributions instead. Investing with meticulous regularity will ensure that you are prioritizing time in the market over attempting to time the stock market’s gyrations.

4. Following hot stock tips

We covered this a little in point number 1 about stock picking. But, you might be thinking, “It’s not me picking the stocks… My really smart friend has already done all the research so I can trust their expert advice.”

Sadly, following stock tips — whether it be from your friends, family, the news, or even the smartest guys on Wall Street — is a sure way to underperform on investments. You’ll certainly be filled with later regrets.

There was a recent study in the NYT that showed just how bad people are at picking which stocks will do well… Out of the 2,132 actively managed mutual funds out there, precisely ZERO beat there a target market benchmark.

This means that the financial geniuses running these funds (whose sole job is to pick good stocks) can’t do it consistently enough to beat the average returns of the overall stock market.

There’s really only 1 stock tip you need to follow: And that is to invest in low cost, broad market index funds. They ARE the benchmark – so they never underperform.

5. IPOs and speculation

There’s a lot of hype when companies go from private to public. The investment banks who help launch an IPO (initial public offering) want to make a splash, so they typically price shares 15 – 25% lower than what they propose the true value is.

But, what many investors don’t realize is that most stock prices have a TON of speculation built in. They are artificially inflated by “future potential,” not the current fundamentals of the business at the time. While many IPOs perform well on their first day of trading, many also drop to a lower price very quickly.

Speculation gets investors in trouble. If you are buying something solely based on the fact that it *might* be worth a higher price to someone else later, you’re taking a big gamble.

Instead, if you want to be a successful investor and build long term wealth, it’s better to invest in well established, proven companies. It might be boring, but it’s a less risky way to make money.

6. Leverage and margin trading

When you invest using leverage, you’re basically fast-tracking and magnifying your results. If your investments are successful, you’ll have a wild ride upwards! But if you make poor choices, your account spirals downwards very quickly.

Here’s what most people don’t understand about leverage… The potential curse outweighs the potential blessings. Let me explain…

Let’s say you buy a stock worth $100 using 80% leverage. This means you use $20 of your own money to fund the purchase, and borrow the other $80 from a brokerage firm.

In a scenario where the stock then rises 20% in value, from $100 to $120, you will have made a HUGE gain. Your out of pocket cost of $20 is now worth $40 (minus the broker debt). That’s a 100% ROI!

But, if the stock happens to decline by 20%, from $100 to $80, you will have lost everything. Your $20 investment is now gone completely, because the broker debt of $80 is all that’s left.

All in all, leverage amplifies volatility. And since the stock market is already very volatile, losses can be huge and extremely difficult to recover from.

Lesson: Don’t use leverage or trade on margin. You should only be investing money you don’t need for the next 10+ years (or longer!)

Related posts: Good debt vs. bad debt and how to retire early (the smart way)

How Many People Lose Money in the Stock Market?

About 90% of investors lose money trading stocks. That’s 9 out of every 10 people — both newbies and seasoned professionals — losing their hard earned dollars by trying to outsmart an unpredictable and extremely volatile machine.

Here’s a quick glance of the reasons most people lose money in the stock market:

6 Reasons Why Most People Lose Money in the Stock Market (2)

How to *Not* Lose Money:

Whether you’re investing inside a brokerage account, your 401k, Traditional or Roth IRA, it’s important to avoid the common mistakes most people make.

To summarize the takeaways and lessons learned:

  • Don’t stock pick or day trade. Instead, invest in low-cost index funds.
  • Be patient, and leave your money invested during downturns. The longer you’re able to leave those dollars alone, the better you will do.
  • Invest early and often. Don’t try to time the market.
  • Ignore stock tips and get rich quick ideas.
  • Only invest money you plan to leave untouched for decades.

Simply put; if you follow what the average person does, you’ll get the same results as them, too. But if you spend some time learning about common investing mistakes, you can easily avoid them and thrive as a successful investor. This applies to the stock market, and really any type of investment vehicle for that matter.

Ps. We’ve had the pleasure of interviewing several successful long term investors on our podcast. If you’d like to hear more, check these out:

  • Episode 175: Simple and Smart Investing with JL Collins
  • Episode 265: The Psychology of Money with Morgan Housel

**Feature pic by Towfiqu barbhuiya on Unsplash

6 Reasons Why Most People Lose Money in the Stock Market (2024)


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