Points for small investors - How retail investors lose money

How retail investors lose money

The reason is simple - a retail investor is driven by greed or fear. Never logic.
• Retail investors are always the last to enter a bull run
• "Smart money" enters markets long time back when markets are at its bottoms, there is frustration all around and no one wants to discuss markets
• When markets start booming and indices make new peaks, the retail investor "wakes" up. At this stage, he is still not sure and is a fence sitter.
• Lastly, there is optimism all around. Every one is bullish and talking markets. Stocks which were never traded in a year, suddenly start moving and start reaching "new highs"
• At this time, the retail investor starts buying as he does not want to miss out the "action"
• The retail investor will display a marked preference for "low priced" stocks because these are "cheap". He will stay clear of index stocks as these are "expensive"
• This is also the time when "smart money" starts moving out
• When a correction happens, it is usually quite severe
• The retail investor does one of two things. He either decides to wait (the optimism is still there) or he starts "averaging" his costs. Averaging is nothing but trying to " catch a falling knife"
• At some time or the other, panic sets in. The retail investor will then sell off all holdings as a distress sale.
• Sometimes the retail investor will do nothing but wait for the markets to rise
• When the markets do rise, he will sell off all his holdings at the first available opportunity and thus miss out on the new bull run

Other facts
• In a bull run, the retail investor is usually the first to sell off his holding. This investor seldom waits for the bull run to continue
• Those who have never participated when the rally started will invariably jump in towards the end of the bull run
• Retail investors rarely follow stoplosses. Circumstances eventually force them to take a bigger loss
• Lastly, retail investors spend an insignificant amount of time researching an investment as compared to buying a mobile or fridge.