Investing in the stock market is one of the best ways for the average Joe to build wealth. Unfortunately, average investors are usually bad investors for several reasons.
Many people fear the market and make irrational decisions around their investments that affect their long-term financial situation. It’s easy to understand why, too: people are emotional first, rational second (if at all). Because of the way the markets work, they essentially go against human behavioral biases and our intuition.
There are four main reasons average investors don’t see high returns on their portfolios over time, and don’t take advantage of what the stock market offers.
Average Investors Are Ruled by Emotions
Humans are emotional creatures. While the highs and lows of how we feel can be a great way to experience all that life has to offer, emotional-based decision making has no place in the stock market.
But the average investor is ruled by their emotions, which can lead to undesirable consequences.
They panic at the onset of trouble, rather than riding the wave. The stock market is a long-term endeavor. You need to be in it for the long haul, and not bail at the first sign of trouble.
Average investors panic when the stock market takes a tumble. They feel euphoric when it sets record highs day after day. And when they panic, they sell. When they feel confident, they buy.
In other words, they buy high and sell low. This is the exact opposite of what smart, above-average investors do.
The Average Investor Wants (and Tries) to Outsmart the Market
Average investors who feel financially savvy are often tempting into trying to outsmart the market for maximum gains. They make decisions to try and drive profit and prohibit loss. They may think of the stock market more like a game that you can rig or hack for a huge (and immediate) payout.
But again, you should invest for the long term and plan to ride out the highs and lows. Your focus should be on the performance of the market over years — you shouldn’t get tripped up by individual days or weeks.
The stock market is not a game and shouldn’t be played like one. It’s a powerful vehicle that can yield bountiful gains — if you stay put and don’t try and outsmart the market by timing it, or trying to succeed at short selling, or any other trick.
Average Investors Gravitate Toward Trendy, Not Tested
Almost no one — not even the experts — can consistently pick winning stocks year after year after year. But average investors somehow convince themselves that they can find and buy the next big thing.
They get into what seems trendy and exciting, instead of what’s tried and true. They also tend to follow the herd.
As an investor, it’s important to do your due diligence on your investments and and think long-term.
Don’t base decisions on what’s trendy now, or what other people claim is a hot stock, or what the media says is a sure winner. A passive strategy — rather than a stock-picking or fund-picking active one — produces better results over and over again.
The Average Investor May Lack Diversity in Their Portfolio
The old adage “don’t put all your eggs in one basket” rings true for the stock market as well. A balanced and diverse portfolio of various types of investments helps to take advantage of the market’s ups and downs and allows you to weather volatile markets.
Average investors may fail to diversify or hold the proper asset allocation for a variety of reasons, but the end result is the same. If that one asset class takes a hit, the entire portfolio (and therefore the investor’s wealth) suffers.
How to Become an Above-Average Investor
Without a doubt, the stock market presents a risk for all investors. Every investment comes with a degree of risk — but the problem is that average investors tend to take on more risks than good investors. They make emotional decisions or indulge in bad investing behaviors.
You can rise above average by investing for the long term. Choose a low-cost passive strategy rather than trying to pick and choose individual stocks.
Hold a wide range of assets and contribute regularly to your holdings — don’t try to time the market, or sell when everyone else does only to buy when everyone else is doing that, too. Stay the course!
Are you guilty of any of these bad investor habits? How do you approach investing?