If you are like the average investor, you fail at investing. I’m sorry to be so harsh, but studies have shown this to be true. The average investor only earns 2% a year while the stock market earns an average of 8%. Why the discrepancy? The main reason is because we are human and we derail ourselves from what should be done. Below I list 4 of the biggest reasons why you fail at investing. Are you guilty of any of these?
4 Reasons Why You Fail At Investing
You’re A Trader, Not An Investor
If you find yourself placing buy and sell trades frequently throughout the year, then you are a trader and not an investor. An investor creates a plan and chooses a basket of investments to invest in. Then she makes it a point to continuously buy more and more of these holdings. There is no selling because she is invested for the long-term.
When you trade, you are trying to take advantage of short-term market fluctuations. This is virtually impossible to do consistently. Sure, you will get lucky here and there, but for the most part, you will fail.
Think of the stock market like the wake from a passing boat while you are in the water. If you are close to the boat as it passes by, the waves will be high and you will take in a lot of water. But, if you are farther away from the boat, the waves will be virtually non-existent and you won’t take in any water. The same holds true with the stock market. Over the short-term, prices are choppy and it hard to know what to do, but over the long-term, the market calms and prices tend to rise.
Victim Of Emotion
We never make smart decisions when we are emotional. This holds true when it comes to investing as well. When everyone is excited and making money, our natural tendency is to invest more to make more money. When everyone is pessimistic and the market is dropping, we want to run for the hills.
These are the exact wrong things to do. You want to buy low and sell high. But even better, you want to take your emotions out of the picture completely. How do you do this? I’ve found automation to be the best. Simply set up an automatic investment to run every month. If your investing is automated, you don’t allow your emotions to interfere.
Even the best of us tends to procrastinate. We put off fixing the fence or cleaning out our files. When it comes to investing, we also procrastinate. Think of how many people you know who haven’t started to save for retirement yet. You might even be one of them.
Unlike cleaning out your files, putting off investing costs you big time. This is because you lose out on the power of compound interest. For example, if you invest $10,000 for 30 years at 8%, you end up with roughly $100,000. But if you wait just 5 years, you end up with roughly $68,000. That’s a difference of over $30,000!
Trying To Get Rich Quick
This point is tied to the point above about being a trader and not an investor. The stock market is not a place to get rich quick. And before you go running off to try and find a get rich quick idea, let me save you some time: getting rich quick isn’t possible. If it was, a lot more of us would be billionaires. To further my point, if there was a way to get rich quick, why would someone be selling it? They shouldn’t need to make any more money because they are already rich from their idea.
The stock market is a place to build long-term wealth. You invest consistently over time and compound interest works its magic and your money grows. Over time, you can expect an average return of roughly 8%. At that pace, you will double your money every 9 years. Granted you won’t see an 8% return every single year, but averaged out, you can expect 8%. I’m more than happy with 8% and you should be too.
If you aren’t a successful investor, chances are it’s because of your actions and not the market. If you invest money on a consistent basis, you will come out ahead. But you need to invest regularly and give it time. You can’t jump in and out or think you will become a millionaire tomorrow. It just doesn’t work that way and you shouldn’t believe anyone who tells you otherwise.