Why Investors Lose Money on Wall Street: Fear and
Greed Cycle
Every time one person is making a dollar on the stock
market, someone else is losing one
By Jeffrey D. Voudrie, CFP
May
5, 2008 - Investors fear losing money, but they are almost as
afraid of losing out - of not making money when they could
have. This is referred to as the fear and greed cycle and is one reason
the Wall Street pros make money while the individual investor often
loses it.
Here’s what typically happens - let’s use a
hypothetical investor named Sam. Sam hears about how much money his
buddies are making in the stock market. So Sam decides to invest his
retirement money in the market, too. He goes to his local advisor who
promptly throws his money into the market while Sam imagines all the
money he’s going to make.
Well before long, the market starts to go
down…maybe it loses 3%. (By the way, there will always be times when the
markets go down.) Sam figures the market will turn around in a few days,
and often it does.
But this is one of those times when the market
continues to go down. Now Sam thinks, “What if this keeps dropping? I’m
losing money, not making it!” So Sam calls his advisor…and inevitably
the advisor tells him to ‘just hang in there, it will come back’.
But this isn’t a normal correction and the market
continues to decline. It’s up one day and down the next, but it’s down
more than it’s up. This goes on for days and then for weeks. Before Sam
knows it, his account is down 7-8%.
Sam is really getting nervous at this point.
Everything he hears tells him that the market and the economy are in
terrible shape. And now the thought of losing even more money is keeping
him up at night. (By the way, Sam hasn’t heard from his advisor all
during this time.)
The next morning he can’t take it any more. He
calls his advisor and tells the advisor to sell everything! The problem,
though, is that there are millions of Sams out there and they are all
calling their advisors and saying the same thing. You can imagine what
the markets did that week! When there are more sellers than buyers the
prices drop…and drop quickly.
In the end, Sam loses around 10% and vows to never
invest in the stock market again…or at least to wait until things turn
around. Soon…sometimes within days…the markets start going back up. Sam
hears about it on the news, but the pundits are still saying that the
economy is in terrible shape. So he decides it isn’t time to get back
in.
After a while, the markets are up so much that
everyone on the news is talking about how great the markets are. Those
same experts that were saying the economy was so bad are now saying the
crisis is over and that the markets will continue to go up and up.
At last, Sam thinks the danger is past. He calls
his advisor and moves his money back into the market. Remember…there are
millions of Sams out there and they are all calling their advisors and
saying the same thing. The markets may continue to go up for a while…but
before long they will start to correct.
I think you get the picture. It seems like all that
Sam does is lose money. Why? Because he’s acting just like everyone
else. And that’s the problem. To make money in the markets you need to
buy before everyone else buys and you need to sell before everyone else
sells. Professionals call this the fear and greed cycle. Professionals
are well aware of what the Sams of the investing world are thinking and
the actions they will take.
Investing in the stock market is a zero sum game.
What that means is that every time one person is making a dollar,
someone else is losing one. Whenever you buy a stock there is someone
selling it to you and vice versa. Who do you think was buying Sam’s
stock when the markets were down 10%? It’s the professionals. Who do you
think was selling that same stock back to Sam later when the market was
up 10-15%? That’s right, the professionals.
That’s why it’s the professionals that make money
on Wall Street and not the individual investors that are following the
advice of their traditional ‘just hang in there’ advisors.
If you have a specific question or would like more
information, give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
I will answer your financial question FREE.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive that may not have appeared in
SeniorJournal.com.
Guarding Your Wealth for Seniors, on
SeniorJournal.com, is
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to select
private clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For bookings, email
jeff@guardingyourwealth.com.
Keep up with the latest news for senior citizens, baby
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May
5, 2008 - Investors fear losing money, but they are almost as
afraid of losing out - of not making money when they could
have. This is referred to as the fear and greed cycle and is one reason
the Wall Street pros make money while the individual investor often
loses it.