According to JP Morgan Asset Management, the average retail investor (the investor who trades stocks on their own) loses money when considering inflation. That tells me that most investors are wasting time and money playing the stock market. It also tells me that most investors are doing something wrong.
Here are the top seven investing mistakes made by the average investor:
#1 – Investing with the herd.
Most investors go along with the crowds because they either feel a sense of comfort in doing what everyone else is doing or fear missing out (FOMO). Investors, in general, don’t like to be separated from the crowd, but it’s through herd mentality that bubbles and crashes happen, and it’s not a recipe for success.
#2 – Lottery mentality instead of sound investing.
The average investor is not principled. In other words, they do not invest based on sound principles. While investing basics such as investing in sound companies or assets with strong economic fundamentals and metrics are important to smart and principled investors, the only thing that matters to the average investor is buying low and selling high. They have no idea if a stock will go up, so it’s a dice roll. They treat their trading accounts like their personal Vegas, but the problem is, the house always wins.
#3 – Focused on the short-term.
This goes along with #2, but when you’re constantly looking to hit the lottery, you don’t think long-term. When economic principles don’t matter, you’re focused on the short-term. Continually looking for short-term hits and home runs is a poor recipe for building wealth because, more often than not, with this type of strategy, one triumph is typically followed by two setbacks, as the data has proven.
#4 – Assume greater risk equals greater returns.
The investing risk-return matrix is ingrained in every Main Street investor, where the assumption is great rewards only come from great risks. That explains why average investors are speculative in their investing approach. They buy into the myth that great rewards can’t possibly come from safe, reliable investments.
#5 – They avoid the lessons from the wealthiest in history.
Historically, the wealthiest individuals built their wealth from real estate or businesses with one thing in common – cash flow that could be reinvested and compounded. The ones that went down in history weren’t lottery winners. They built cash-flowing businesses that could be sustained long-term. The average investor thinks this approach is boring and avoids the lessons they can learn from these individuals.
#6 – They rely on news, financial media sources, social media, and the internet.
The average investor relies on everything but reliable sources for their investing advice. They’ll scan the news, financial media sources, social media, the internet, and memes for their investing advice. This all goes along with herd mentality and not wanting to miss out. Smart investors seek the advice of successful investors. They also drown out all the noise and focus on the numbers and data.
#7 – Trying to time an investment or market.
There’s a little bit of cockiness to many investors’ approaches. Many believe they can beat the market and time their investments before everyone catches up. They’re banking on their sense of timing to buy lower than everyone else and profiting from their anticipation. The only problem is, nobody is very good at timing.
There’s a reason wealthy investors are wealthy and not average. They don’t make the same investing mistakes or fall for the same traps as the average investor.
Smart investors are happy to break from the crowd and do something others consider boring or that nobody in the media or social media is talking about because they would rather stick to something that reliably generates income and growth than gamble on something new shiny speculative.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.