Why Most Investors Lose Money Every Year (& How You Can Avoid It)

Most investors underperform the very thing they're trying to beat. And no, it's not because they're dumb or lazy. The truth, the system is built to exploit our emotions.

Now, most people think investing success comes down to picking the right stocks or timing the market just right. But here's the twist. It's not about your strategy. It's about your behavior. That's the real enemy.

From 2003 to 2022, the S&P 500 returned about 10% per year. But the average investor, they were somewhere between four and 6%. That gap, 3.5 to say 6%, that doesn't come from bad investments. Comes from bad behavior.

In this episode, I'm going to walk you through the four biggest behavior traps that destroy returns. And I'll show you exactly how to beat them.

Let's start by looking at the behavior traps that destroy so many investors' returns. Number one, it's panic selling or loss aversion. Loss aversion means people hate losing money more than they enjoy making it. So when the market drops, fear takes over and they sell too soon.

Take the March 2020 COVID crash. The S&P 500, it dropped 34% in just weeks. Many investors ran for cover, cashing out at the bottom. But by August, the market had already recovered.

I had a client who called me back in March 2020. He said, "Phil, I can't take this bleeding anymore. Get me out of the market." I talked him down off the ledge, so to speak. Every year since, he's thanked me.

Number two, it's FOBO buying or fear of missing out. We call that the herd mentality. And that's when you follow the crowd instead of doing your own research. Fear of missing out. It only fuels that behavior.

Let's talk about the Tesla and GameStop. GameStop have soared nearly 700% in the past two weeks. AMC, all of that hype during 2020 and 21. It was wild. Tesla ran over 700%. GameStop hit nearly $500 in January of 2021. Then it cratered, but latecomers bought at the top and they lost their shirts by chasing all of these internet-fueled gains. If you're buying because someone on Reddit told you it's going to the moon, remember rockets burn out.

And number three, it's holding losers too long. We call this the anchoring bias. So anchoring is when you fixate on a past price and you refuse to adjust even when the facts change. Just look at GE stock which hit $60 in 2000 and it never came back but people held on. They were anchored to the past. When the story changes your thesis must change with it. Anchoring to an old high is like hoping your ex turns into your soulmate. It's just not going to happen.

Let's look at number four, performance chasing. And we refer to this as part of the recency bias. Recency bias means you think what just happened will keep happening. So you chase those recent winners.

Take ARK Innovation, an ETF, ticker symbol AR KKK or ARC, which soared 150% in 2020. Everyone was piling in. Then it tanked 70%. Look, buying last year's winner is often a losing strategy. Very often, I might add. By the time it's hot, the upside is gone. You're the last one in the pool and the water is freezing.

Watching too much CNBC or chasing those hot tips, that rarely builds wealth. It builds anxiety and inconsistency, which leads to overtrading and underperformance.

Before we get into how to fix it, here's the good news. These costly mistakes, they are avoidable. And the fixes, they're not just theory. They're proven strategies that can seriously change your results.

Number one, use a rules-based process. Let's get something straight here. Investing isn't about emotion. It's about discipline. Emotion gets involved, you're screwed. Here are the main rules-based processes that you must use. And I'm going to briefly explain each one.

First, it's asset allocation tailored to your goals and time horizon. This just means spreading your money across different investments in a way that fits your age, goals, and tolerance for risk.

Secondly, it's rebalancing regularly or bringing your plan back into balance. Rebalancing means adjusting your investments back to their original plan after things moved around after lots of gains or losses.

Next is something called stop-loss protection when it's needed but not too tight. This is basically setting a limit to cut your losses but not so close that normal market moves would trigger it.

We also want to use dollar cost averaging or buying consistently over time. This is putting money in at regular intervals so you don't try to time the market. You're buying more shares when prices are lower and fewer shares when prices are higher.

And please compare your performance to your plan, your goals, not the S&P 500 every week or even every day like so many people do. The market is not your benchmark. Your goals are your benchmark.

Number two, partner with a disciplined advisor. Let's be honest, most people don't need more information. They need better decisions. And sometimes the only thing standing between you and a wealth-destroying mistake is someone objective enough to stop you. The real value of advice is not stock picking. It's behavioral coaching.

In fact, Vanguard's Advisor's Alpha study, it shows advisors add 3% per year not by picking stocks, but by keeping clients from making bad decisions. A good advisor doesn't flinch when the headlines are screaming. They keep you focused when your emotions are off the rails. Think of them as your financial air traffic controller. You're flying, but they keep you from crashing. They're always watching and giving you advice when you need it.

Let me show you how our firm helps you stay on track. We do this for a lot of people. Everything we do for our clients is built on one simple truth. Disciplined decisions beat emotional reactions every time. Here's how we do it.

We build a framework, not just an investment plan. Your investments are part of your entire financial life. That's why we use our proprietary 10 Elements of wealth management, which help you answer, is my lifestyle sustainable? Am I maximizing tax efficiency? Is my portfolio aligned with my goals?

We use rules-based investment strategies. Our portfolios, they follow a very specific process, not gut feelings from equity income to our momentum. Each strategy is macro and micro informed, meaning big picture and company level analysis. It's built on repeatable rules and they're designed to reduce emotion. Just the opposite of what most investors are doing.

We track what matters. No cocktail party bragging, no guessing. We're tracking things like retirement income. We're stress testing tax impact of Roth conversions, progress towards your real goals. That's what we're tracking.

If you got value from this video, please do me a favor. Hit that like button and subscribe to the channel so you never miss a new episode.

You don't need to outsmart the market. You just need to outbehave the average investor. If this episode hit a nerve or you see yourself making these mistakes, then build a system or better yet, partner with someone who already has.

If you're ready, head to omnarfinancial.com and schedule a call with one of our associates or click that link in the description below. Let's build a better investment experience together.

And speaking of investments, click or tap the screen to watch a video we produced that covers your retirement plan and how to never run out of body.