Reasons Contributing To Investors’ Failure

Author:

2008-09-26 Word Count: 482 Category: Investments

Reasons Why Investors Don’t Succeed.

Between 1986 and 2005, the ‘average’
investor earned a 3.9% return. You might consider that a 3.9% return is
certainly better than nothing; until you take into consideration that inflation
grows about 3% per year! The lack of success could be contributed to personal
beliefs, lack of experience and information, and having too much fun trading
from one fund to another. Why do most investors fail when investing in the stock
market?
Lack of Knowledge
The stock market isn't as cut and dry as
depositing money into your local savings account. A survey of 1,086 investors
who made a minimum of one investment and have portfolios between £10,000 and
£500,000, conducted by the National Association of Securities Dealers in the
USA, shows an alarmingly high number of investors don't really know what they're
doing!
For example, 80% of the individuals
surveyed did not know what a ‘no load’ mutual fund is, and could not clearly
explain the differences between loads and normal operating expenses of mutual
funds.
Just short of half the surveyed didn't
know they could lose their investment when they buy stocks on margin; even if
the share prices don't drop to zero.
It's difficult to make money investing
if you don't understand how money is made when you are investing.
Shiny Object Syndrome
The primary reason the average investor
performs lower than the average mutual fund is because investors are often
attracted by every shiny object that comes their way! They attempt to switch
their money from one fund to the next, looking to chase returns and buy high,
sell low – hoping to find the one that's going to have some amazing returns. Not
understanding the market completely will basically hurt the investor's chance at
earning a return with this method. If you’re going to chase the market and trade
day to day, then you might as well start playing online bingo at a site like
Mecca Bingo and watch your money drip away in the long term. Gambling is
certainly fun – but it’s no way to earn money!
Making Money in the Stock Market
A better method would be to pick a
diversified portfolio, and then stick with it. Everyone who has heard of the
stock market has heard of the need to “diversify your portfolio”, but hardly
anyone actually does this. Track the performance of your portfolio over a longer
period of time, and see if you can match the benchmark returns rather than
trying to catch the next big thing and chances are you'll have a higher return
over the long term. For a variety of investments, including index tracking funds
and the

ISA, take a look at Legal and General.