#1: They Hold Onto Losing Stocks
If you don’t cut your losses, they can run lower and lower until your grave is too deep. If your portfolio drops by 50% then it will take a 100% increase just to break even again. How often do you see people making 100% increases? Thats why you don’t want to get yourself in that deep of a hole. Also, if your stock is causing you losses then it is a weak stock right? Think of it this way: you invest $10,000 in a stock that drops in value down to $5,000. Since this stock is so poor and caused you a 50% loss, pretend that instead of having $5,000 worth of that stock, you instead had $5,000 in cash. Would you invest that $5,000 cash into that poor stock or would you use that $5,000 cash to invest in a stronger stock? You would obviously use that $5,000 in a stronger stock, so wouldn’t it make sense to sell your bad stock and use that money to invest in a stronger stock?
#2: They Try to Predict and Anticipate What Will Happen Next
This will save you a lot of money: First, there is no problem with trying to predict what will happen next, the real problem is when you ACT upon that prediction before it actually happens. Believe it or not, this is gambling; you are putting your money on an event that may or may not happen! What you should do instead is make a prediction, and act on it only AFTER the market confirms that you are correct. Of course you might miss out on a little profit since you weren’t in the stock AS it made a move, but catching it IMMEDIATELY after is good enough and that small amount of missed profit can act as “insurance” that you were correct. How can this save you money? If you make a prediction and act on it before it happens, then if you end up being wrong then you will lose money. So which scenario sounds better to you: losing money, or missing out on a little profit but still making money? Opinions are often wrong, but the market is always right. Wait for confirmation from the market that your prediction is correct. Patience is a virtue.
#3: They Don’t Know When to Sell
You can be the best stock picker in the world, and have the best timing, but if you don’t know when to sell then you will never succeed in the market. If you don’t sell out of a losing stock then you will obviously lose a lot of money, but selling is also important when you are in profit. If you don’t know when to sell and take a profit, then your profits can easily turn into a loss. The following story is a MUST read!
Keep this story in mind. Learn when to sell and take a profit; don’t sell to early and miss out on more profits, but then again don’t sell too late and lose all of your profit. You will master this skill if you invest time into reading a few books I recommend.
#4: They Buy More Stock as it Drops in Price
Plain and simple, it is within our human nature for us to try to get bargains. Why pay more for something when we can pay less? If your favorite pair of shoes go on sale, then of course you should buy them. However, if a stock makes a significant drop in price – BEWARE! You get what you pay for in the market; if a stock drops, it drops for a reason. If the stock was really strong and in demand, then would it be dropping lower and lower? No. That means your dropping stock most likely is not very strong and in demand. Would you rather have a weakening stock that is going lower and lower, or would you rather have a strong stock that is going higher and higher. Stop drooling over the saying “Buy low and sell high.” If it was really as simple as buying low and selling high, wouldn’t everybody in the world be rich?!
#5: Lack of Knowledge
As I’ve said before: You don’t always have to learn the hard way. You shouldn’t have to lose thousands of dollars in the stock market before saying, “ok, I think I need to find a better strategy.” The problem with the stock market is that anybody can join at any time. Would you try out for a baseball team if you’ve never even played baseball before? Of course not! The reason so many people lose a fortune in the stock market is simply because they are not educated about the market, they jump in too soon, and they want to get rich quick. If you don’t learn all you can about the market first, then you are setting yourself up for failure.