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In the same category
Why Investors Lose Money?
From the Archives
Originally published February 01st, 2007
786 words - Reading time : 1 - 3 minutes
( 3 votes, 4.3/5 ) Print article
 
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Investors have a number of weaknesses which often result in investment failure. Identifying these weaknesses is the first step to reducing them. Our Investment Scoring and Timing System is designed to help minimize these weaknesses in order to give us a potential advantage over the market. The following are some key reasons why we believe investors lose money.

1) Emotions

Money is important to our survival, social status and way of life and therefore dealing with finances is an emotional subject. As a result emotions tend to have exceptionally negative consequences on our investment decision making. When our investments are doing well, we tend to add to our positions or hold on to our investments too long. Alternatively, when our investments are doing poorly we tend to sell our positions in fear of losing money. This response is not conducive to making a successful investment. Emotional investment decisions tend to cause the investor to "buy high" and "sell low". Obviously this is not the best strategy.

As a group, people tend to make terrible investors. People often have a desire to be accepted among their peers and frequently seek comfort and approval from others. They like to share common thoughts and theories at social events. For instance, people find it agreeable to discuss popular topics such as a "hot" real-estate market. In the peak of a bull market it is fun and easy for everyone to get along and agree on the current "hot" market. However, few investors buy when a market is unpopular and not doing well, but history suggests these are usually the ones who succeed with their investment strategies. These are the investors who see value in unpopular investments and buy when they are "on sale". Often these individuals are dismissed as being "uninformed" because they disregard the latest perceived, "can't lose," "hot" investment. In reality we can not all make money. Someone must lose if others are to gain. History repeatedly demonstrates that it is the popular group belief that generally takes the loss.

2) Discipline

Some investors may realize the pitfalls of emotional investment decisions but because they lack an investment strategy they still fall victim to the same problems. It is hard to resist the temptation to hold onto a winning investment. People gamble and want to hold onto that investment a little longer than advisable. Contrarily, if an investor has experienced previous losses, it is hard to resist selling an investment to lock in the profits. However when they do, people are often disappointed with the trivial gain when that same investment continues to increase in value many times over. Discipline is an exceptionally difficult trait to master. Methodically approaching your investment strategy with a predetermined plan and system makes disciplined investing easier.

3) Ignorance

People are taught throughout their lives the importance of studying hard in order to get a good job so that they will earn a good pay. Unfortunately they are not taught what to do with the money after it has been earned. It is our opinion that a small percentage of the population benefits from this ignorance. As shown in the past, a massive transfer of wealth from the general population to a select few regularly occurs.

Also, people tend to naively believe they will outperform the market with little to no strategy. Even worse, investors commonly implement widely accepted yet faulty strategies that greatly reduce their probability of success. Understanding basic rules and having a predetermined system helps investors remain focused and be on the right side of the trade.

4) Misinformation

Networks and various media often discuss current financial trends. In our opinion the "hype" of the media calling this move or that move is merely speculative "noise" and generally irrelevant. These short term explanations make us question our investments, sell out early, buy late and generally create an unwanted emotional response. This "noise" and potential misinformation causes us to lose focus of the "big picture" and major trend. We believe it is this "noise" that stands between success and failure as an investor. We use Our Charts to help illustrate the market trend and bypass this emotional noise.

Investors at all levels struggle with the common problems listed above. Knowing natural weaknesses can only make an investor stronger and Our System helps keep us focused on buying low and selling high.

 

Michael Kilbach

Editor

Investmentscore.com

 

Michel Kilbach is the President and Editor or www.investmentscore.com, an online publication designed to show investors how to make profitable entry and exit trading decisions in high growth potential investments. Investmentscore uses a unique scoring system as a visual guide to assist investors in making lower risk / higher reward trades.

 

Copyright © 2006-2007 Michael Kilbach

 

 

 

 

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Michael Kilbach

Michel Kilbach is the President and Editor or www.investmentscore.com, an online publication designed to show investors how to make profitable entry and exit trading decisions in high growth potential investments. Investmentscore uses a unique scoring system as a visual guide to assist investors in making lower risk / higher reward trades.
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