Most people lose money to their own habits. The market barely has to help.
That sounds harsh, so let me make you a deal. Stay with me for six short sections, and I will show you the six habits that cost you the most. Then I will give you a setup that takes about 10 minutes to build. After that, it does the hard part for you, every month, without asking.
I should warn you. One or two of these will sting.
P.S. At the end of the article, I’ll give you a checklist to download so you’re never in doubt anymore.
1. You think you are better than most
Ask a room full of drivers who is better than the rest, and almost every hand goes up. We all do this. The stock market version just takes longer to show up.
Here is the part that should get your attention.
Some people at a school in the U.S. dug into 66,000 real accounts over six years. They sorted them by how often each one traded. Before costs, all of them made about the same, close to 18.7% a year. After costs, the busiest group kept 11.4% a year. The calm group kept 18.5%.
It was the same market and the same six years, so that whole gap came from the clicking.
There is one more twist, and it is the mean one. When these folks sold one stock to buy a new one, the stock they sold went on to beat the one they bought. So they paid a fee to make their own stocks worse.
One fair note: that study ran in the 1990s, when each trade cost real money. Trades are free now, so that part of the damage is smaller. The bad picking part did not go away. Free trades just let you be wrong faster.
Ask yourself: how many of my trades last year would I have skipped if each one cost me 30 euros?
2. You pull up your flowers and water your weeds
You own two stocks. One is up 30%. One is down 20%. You need some cash. Which one do you sell?
Almost all of us sell the winner. It feels great. You get to be right out loud, with a number to prove it. Selling the loser means you have to admit you got one wrong, and nobody enjoys that.
In those same real accounts, people were about 50% more likely to sell a winner than a loser. Then the winners they sold went on to beat the losers they kept.
So the trade that feels good is often the wrong one. It is a rough rule and it holds up more often than you would like.
Try this today. Before you sell, ask one question. If I had cash right now and owned neither of these, which one would I buy? Then go with that answer and leave your feelings out of it.
3. After a win you get brave, and after a loss you get strange
Card players have a name for this. They call it playing with the house money. You win a nice pot early, the chips stop feeling like yours, and you start betting bigger.
In one test, people who had just been handed a small win took a coin flip bet 77% of the time. People who were offered that same bet with no win first took it 41% of the time. The odds were the same and the money was the same, and yet the choice went the other way.
Losses do something odd. After you lose, you go quiet and careful, and you stay that way until you smell a chance to get even. Then you will take a bet you know is a bad one, because getting back to zero feels like a win.
You can see it at a horse track. The long shot bets pile up late in the day, once the crowd is down.
Your stocks have the same problem. The room just has better light.
Ask yourself: did I size my last buy from my rules, or from how my last trade went?
4. Your memory lies to you, and it means well
This one is my favorite, because it is so human it is almost sweet.
