Effective investment planning aims to grow wealth over time and is a long-term strategy. However, investing presents a financial risk that means investors can lose money.
There are many reasons why people lose money investing, however there are ways to manage risk. Here, we’ll take an in-depth look at the most common factors causing investors to lose money, and explore some of the approaches that can help prevent a negative outcome.
Key reasons people lose money investing
Investment involves taking financial risks where you might not receive the full amount invested back. While some reasons for losses are outside of investor control, other are a result of personal decisions.
Financial markets are constantly fluctuating. Market volatility can be caused by several factors, including financial crises, geopolitical tensions and economic data. As a result, the value of investments can vary greatly and significant declines can occur, periodically shrinking capital. Company failure is another cause, beyond control of investors. When money invested in a company’s stocks fails and it goes bankrupt, investors can potentially lose their entire investment.
There are also some causes of losses that investors can influence. As mentioned, market fluctuations can involve downturns, but they can also recover. Investors often turn a temporary loss into a realised one when they panic during market dips and sell at the wrong time. This investing behaviour is sometimes referred to as “emotional decision making”.
As such, it’s important for investors to remember the difference between realized and unrealised losses. A loss is only realised when an asset is sold for less than the price it as purchased for. Before, it is an unrealised loss that could recover.
Chasing trends hyped on social media is also another ill-advised strategy. Buying stocks based on tips often involves securing assets at the highest price and can result in losses when the hot trend starts to fade.
When investors ignore taxes and fees, this can also result in losses. High management fees, transaction charges, commission and tax inefficiencies can eat into potential investment returns.
How can you manage risk when investing?
Experts in investment planning in Oswestry, Chester and other parts of the UK understand that there are ways to help mitigate the financial risks involved in investing.
Investing heavily in hopes of a large short-term return carries an extremely high risk. Taking a long-term approach to investments may be more widely advised, as holding an investment for longer gives more time for financial markets to recover and reduces the chance of investors losing money.
Additionally, financial advisers recommend using diversification to reduce risk. Wealth managers build balanced portfolios that spread investors’ money across multiple asset classes and investment types. If an investment is performing poorly, it does not impact the entire portfolio, and other investments may perform better than expected, creating balance and reducing the possibility of financial losses.
Taking a long-term approach to investing also applies to the money invested. With an understanding that investments are less risky when invested over several years, investors should avoid using short-term money to finance the. As a rule, advisers recommend investing money that investors won’t need access to for a minimum of five years.
Having a clearly defined investment strategy can also help curtail losses. Unplanned investing without a clear goal, risk tolerance and time horizon makes it hard to effectively manage assets. This often leads investors to make impulsive decisions. Professional investment advisers work closely with their clients to develop personalised plans that have a specific goal and timeframe that fits the investor’s attitude towards risk. An established investment plan is also critical to measure the success of an investment portfolio and ensure that investments are still on track to meet specific financial objectives.
Are you looking for expert investment management in Oswestry and Cheshire?
Specialists in investment management in Cheshire and Oswestry, at Hartey Wealth Management we supply a comprehensive service to investors. Our tailored investment services are specifically designed for investors seeking to manage their money, with full support from a professional investment adviser.
To learn more about investing you can attend one of our expert-led seminars, or reach out for a one-to-one with our advisers today so we can recommend an investment portfolio that matches your individual needs.
