Why Investor’s Lose Money In The Market?

Fund-Matters | December 25, 2019 | Investing, Investments, Personal Finance, stock market, Stock Market Investing, Stocks, | 0 Comments
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Let us imagine we are in 2008, early months of January or February. India depicted a great growth story with a strong rupee, solid GDP growth, Nifty plunging seven times since 2003. Hence, financial advisor pushed investors to have aggressive approach with the prediction that the next decade belonged to emerging markets like India and China.

However, all the predictions went wrong as Lehman Brothers crisis hit the markets in September 2008. The share of stocks fell by 50%, scaring investors and pushing them out of the market. It took investors six years to recover the capital, In the last 11years their capital grew by 6.9%.

Investors who started investing a few months later precisely in October 2018 bought stocks at a very low price and following the market debacle their money grew very fast at 17%.

These are two extreme examples. If someone kept investing without being affected by the market movements, his money would have grown at 12%. But such tendencies are rare to find which results in investors losing money in the markets.

Here are few behavioral biases why investors lose money in the markets:

Anchoring

One’s belief is a strong virtue which we tend to hold on to the point of being biased. In terms of investments, we tend invest looking at the previous year’s returns. This is a very wrong way of making investments. This is one of the reason why we lose money. Look at the company’s fundamentals, not a year’s value.

Loss aversion

Losing Rs. 100 is more painful than gaining Rs. 200 and once we lose money in the market, we stay away from it forever. The best way to handle the fear of loss is to adopt asset allocation strategy which strikes a balance between risks and returns and create a portfolio with loss levels that are digestible to you.

Choice paralysis

Sometimes we are unable to choose the right product just because there are too much of information all around us. The ways to avoid it – first understand your goal, then filter funds based on your investment objectives and tenure. This limits your options helping you to make a quick decision.

Recency

We all remember the recent past rather than the actual past. In every bull market, we think of new highs, and often increase our own risk taking appetite, just because we feel bullish. With the onset of a bear market, reality dawns as NAVs fall.

In investing, recency bias is prevalent especially in sectoral funds which investors often choose at their peak, only to have a bad experience after investing. The best way to avoid this bias, is to avoid seasonal opportunities, and stick to fundamentals.

Herd mentality

Stop following what others are doing and try to judge your own risk appetite and goal to understand how and where to invest. This “power-of-the-crowd” mentality has created many a bubble in financial industry, as markets run ahead of valuations because of the impact of flows and liquidity.

Herd mentality is the hardest bias to avoid, and the best way to avoid it is- following fundamental analysis. Ask difficult questions that no one is asking and don’t invest till you find the answers.

If you follow these simple rules, you can avoid losing money in the markets.

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