Around 90% of all retail traders and investors are worse off financial, after the first couple of years in the stock market, than before they started trading or investing. And that’s if they make it through those early years without going broke.
This is a staggering statistic and one that is echoed around most of the financial markets of the world.
But why do so many people fail in the financial markets?
Is it because the market is surreptitiously stacked against the unsuspecting retail investor or trader? Or perhaps there is a secret formula that only the ‘chosen few’ know about? Or maybe it is simply because most traders and investors do not know what it takes to be profitable.
After trading stock and derivatives for over a century I have narrowed it down to what I believe are the twelve reasons why traders and investors either go broke in the stock market or fail to be profitable over the long term.
This post is the first in a series of posts that will explore the twelve reasons why ‘you’ will never be profitable in the stock market. Some of the reasons will seem obvious, others may come as a surprise, but each and every one is financial devastating if neglected.
In this post we’ll look at the first three:
- No investment objectives
- No wealth creation plan
- Using a flawed investment or trading strategy
1. No investment objectives
Most would-be traders and investors jump straight into the stock market without any clear idea of what they want or what they are trying to achieve. They have no short, medium or long term objectives. Their only focus is to make money and make it fast!
Participating in the stock market is sometimes compared to a battle field or war zone. And no army would enter a war with out a precise set of objectives. Professional traders and investors are no different. They set precise short, medium and long term goals.
When you trade or invest in the stock market you are trading against professional traders, market makers and fund managers. And because you’re competing against these market pro’s, you need to know precisely what you’re aiming to achieve?
A lack of clearly defined objectives leads to a poorly designed trading plan, inappropriate risk taking, woeful decision making and ultimately financial destruction.
Setting financial objectives doesn’t need to be a long and difficult process. To get started you need to consider a number of basic points including:
- What you want to achieve over the long term?
- What is important to you financially?
- What your specific investment goals are?
- How much money you want to earn each month (or year) from your investments?
- What annual income would you like?
- What you’d like your Net Worth to be in 1 year, 5 years, 10 years and 20 years time?
- What financial assets you’d like to own?
- How much money you’d like to have in retirement?
- What your plans for retirement are?
- What benchmark will you use as a means of tracking your performance?
Answering these questions gives you a basic set of financial objectives which you can use as a foundation for your overall wealth creation (investment) plan. And that leads me to the next area where traders and investors get it wrong – not having a wealth creation plan.
2. No wealth creation plan
A wealth creation plan differs from a trading plan. A wealth creation plan is your overall strategic approach to achieve wealth. It is the high level plan of ‘how’ you plan to build wealth. It can make use of a variety of financial assets including: stocks, bonds and property.
A trading plan on the other hand is a part of your wealth creation plan. It is a tactical plan that covers your trading strategy and includes: security selection, entry and exit points, risk management and money management techniques.
Having a set of financial objectives is a great place to start, but you need to have a strategic plan to make it happen and this is where your wealth creation plan comes to the fore.
Your wealth creation strategy should encompass your:
- Investment Objectives;
- Financial Benchmarks (measurable targets, % return per year, income goals, etc)
- Personal Development Goals (from a financial perspective);
- Strategic Plan (the markets, assets, products, etc you intend to use);
- Broad Tactical Plan (the tools you’ll use to generate wealth and the timeframe of your objectives);
- Capital Allocation Plan (how you intend to distribute your capital amongst your various wealth building assets).
These six critical elements will then form the foundation around which you will build a trading plan.
3. Using a flawed investment or trading strategy
A trading system or trading strategy is the ‘nuts and bolts’ of any trading plan. It contains the money making elements of the wealth creation model. At its most basic it should cover stock selection, entry and exit methods, risk management and money management techniques.
When it comes to trading strategies unprofitable traders and investors tend to make the same mistakes. The first mistake is that they ‘borrow’ someone else’s strategy and then try to make it ‘their own’.
There is nothing wrong with drawing inspiration from other traders and investors. But where many new comers or intermediate traders and investors go wrong is that they either draw inspiration from one of the many “gurus” selling get rich schemes and black box systems or they ‘borrow’ someone else’s trading strategy without any regard for their own personal risk profile.
Unprofitable traders and investors often try to ‘force’ unsuitable trading strategies upon themselves. And because they don’t appreciate their own risk tolerance or they fail to adequately assess the level of risk associated with a particular trading system they become victims of their own poor decisions.
The second even more fatal mistake that unprofitable traders and investors make is that they don’t appreciate what actually makes a trading or investment strategy profitable. Unprofitable traders and investors literally waste years searching for the perfect system.
They chase the elusive ‘perfect system’ because they don’t understand what separates profitable traders from unprofitable ones. They think success lies in having more winners than losers.
They fail to appreciate that even if you have more winning trades than losing trades you can still lose money. They don’t realise that if the average amount won is smaller than the average amount lost that the strategy will send them broke.
So how do you protect yourself from these mistakes? Firstly, to ensure you don’t fall victim to a flawed strategy make sure you have a sound understanding of your risk tolerance. Secondly, take the time to learn what REALLY separates a profitable strategy from the rest.
These two steps alone will set you apart from the masses of unprofitable traders and investors.
Well there you have it, the first three reasons why you’ll never be profitable as a trader or investor. So, how do you stack up?
Have you established:
- A clear set of investment objectives
- A wealth creation plan
- A sound trading or investment strategy that matches your risk profile?
If you would like more information on what separates a profitable trader or stock investor from the pack, why not SIGN UP for our FREE E-Course ‘Mastering Profitability’.
Take Action
1) Sign up for the FREE E-Course. Just enter your first name and primary email at the top of this website.
2) Leave a comment. Tell us what your financial objectives are or what your wealth creation strategy entails.
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