4 ways to lose everything in the stock market

Investing will always be a risky business but making these mistakes could buy you a ticket to the poorhouse.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Survivorship bias — the tendency to read about and celebrate the successes of a very small number of people — ensures that the vast majority of us will find the task of naming legendary investors fairly easy. Warren Buffett will feature, of course. So might Benjamin Graham, George Soros and Peter Lynch. 

What’s less talked and written about are the many market participants who’ve lost huge amounts of money — perhaps everything they own — through ill-discipline, poor decision-making and bad luck. While we can’t do much about the last of these, we can try to minimise the probability of joining this club by identifying examples of the first two.

Here then, are a few ways that could cause you to lose a lot, if not all of your money, over the course of your stock market journey.

1. Letting your emotions run wild

Round-the-clock news coverage arguably makes staying the course harder than it ever used to be. Brexit, Donald Trump — there’s never any shortage of stories that have the potential to lead investors to make impulsive (and usually erroneous) decisions, sending share prices down.

As I’ve become more experienced, it’s become apparent to me that successful investing is less about trying to develop an ice-cool temperament and more about acknowledging that I’m as prone to behavioural foibles as anyone else. If you like, it’s akin to recognising that a diet is more likely to be successful if you refrain from buying your favourite calorie-laden food than attempting to store it ‘out of reach’ in your house. If said treat is nowhere to be found, there’s no need to expend a great deal of willpower resisting it.

Applying this idea to the stock market, it makes no sense to check your portfolio every day if you’re likely to stay invested for years and possibly decades. Doing so merely raises the likelihood that you’ll take action when none is required.

This isn’t merely confined to periods of panic, of course. At this time of the year, markets can feel sluggish and the temptation to do something, anything, to relieve boredom can be strong.

In such a situation, I find it’s worth recalling the famous study by financial services group Fidelity which showed that its most successful clients were either already dead or had completely forgotten they ever had accounts. 

To be clear, the correlation between taking action and stock market success appears decidedly negative.

2. Failing to diversify

A quick look at the history of stock markets over the last two decades should explain why the idea of putting all your eggs in one basket (be it a company or sector) is anathema to Foolish investors.

Think back to the speculative dotcom boom at the end of the last century. Back then, a huge number of tech stocks soared on the back of hype and very little else. Many investors, swept along by excitement, began to value businesses based on anything but traditional metrics. We know how that story ended.

Had you invested purely in boring old banks back in 2007, you’d have also lost a lot of money, at least on paper. The fact that the share prices of such supposedly ‘safe’ stocks are still to recover to pre-crash levels tells you why it’s so important not to rely on any single sector to perform. 

Will adding a bank stock to your portfolio today hurt your chances of doing well? Probably not. In fact, the huge dividends currently being offered by the likes of Lloyds and HSBC suggest having at least a few shares in one could be sensible. Owning both is questionable though, especially if you are still committed to running a fairly concentrated portfolio.

An alternative strategy would be to have the core of your portfolio composed of cheap index trackers or exchange-traded funds, thus spreading your money over hundreds or even thousands of different companies. Any remaining cash can then be invested in a limited number of what you consider to be your best ideas.

3. Listening to bulletin board posters

I’m not averse to reading the odd bulletin board now and then. Considering the opinions of others, particularly those that diverge from your own, is a great way of avoiding confirmation bias — the habit of only seeking out information that agrees with what you already think. Becoming attached to shares may sound absurd but its surprisingly easy. That’s why reflecting on the reasons why a particular company may fail or underperform is just as important as thinking about why it might thrive.

Having said this, basing any investment decisions purely on the back of what someone posts is folly. For one, you have no idea who this person really is.  Moreover, if he or she believed they knew exactly where markets were headed in the short term (tip: no one does), do you think they’d be so benevolent to post it on a free-for-all discussion board?

Even if you’re aware of the identity of a bulletin board poster, it would be a mistake to assume that their attitude to risk, financial goals and investing time horizon are exactly the same as yours. Which brings me to my final point.

4. Skipping on research

The ease at which people can now buy and sell stock in companies belies the fact that consistently successful stock-picking can be both hard work and time-consuming. Unfortunately, a lot of people don’t have the inclination to work their way through the full-year figures or latest news release from a company, preferring to buy into an exciting story than to question whether every chapter of that story is likely to be told.

Becoming a successful investor doesn’t require a degree in finance. Nevertheless, profits can be determined by your own diligence and a willingness to evaluate a stock based on a clear, concise checklist (including qualitative aspects such as perceived economic moats in addition to numerical valuations). Doing so can only serve to strengthen your confidence in any purchase that is subsequently made. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

10%+ dividend growth! 2 FTSE 250 shares tipped to turbocharge dividends

These FTSE 250 income shares look in great shape to grow their dividends by double-digit percentages, says our writer Royston…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

Would it be madness to buy this FTSE stock smashed by Donald Trump’s team picks?

Ben McPoland takes a look at one FTSE share inside his portfolio that has been battered lately due to a…

Read more »

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »