3 tips to avoid losing money on the market

Are you losing money on the market despite your best efforts?

Wish you could make more reliable returns?

Maybe you have a little extra cash and you’d like to invest it but don’t know where to start.

Returns are never guaranteed on the market but this article might help you get closer to a winning position.


1 – Understand the difference between a bull and bear market

If I’ve already lost you, don’t worry, it will all make sense soon.

Frankly, the world of finance likes to use complicated terms. I sometimes wonder if it’s only meant to confuse people. Most of this stuff is not as complex as you might think.

Basically, during a bull market, prices go up. During a bear market, prices drop.difference between bull market and bear market

The economy serves as a good indication of which kind of market we’re in.

If the economy is healthy, so is the stock market (bull market). During times of recession, wall street also suffers (called a bear market).

It’s important to understand that this doesn’t apply to the share price of only one company. We’re talking about market trends as a whole.

If you pick up any newspaper or news app, the finance section will always show market changes through indexes (such as NYSE, NASDAQ, S&P 500, Dow Jones).

Here’s an extract of the index trends from Bloomberg Markets:

bloomberg daily index graphs

Every one of these columns is a different index which essentially encompasses hundreds to thousands of different companies (depending on which index you’re looking at).

Think of an index as reading the one-page summary at the back of a 10 volume book. Thousands of pages condensed into one to give you a general sense of what the book is about.

Looking at the general markets won’t tell you how your specific stocks are doing but it serves as an indication of the overall health of the market.

Wondering why that’s relevant?

The market acts and moves in unison. When it tanks, most individuals stocks follow.

If the indexes or on the rise, then there’s a tendency for share prices to increase. That doesn’t mean that there were no drops in prices. However, when you combine all the stock prices in the index, the tendency is for a price increase.

How does this help me avoid losing money?

Invest in a bull market and stay clear of a bear market

Easy enough right?

But how do I know if we’re in a bull or bear market?

Now that you understand the difference between the two, it’s a matter of keeping an eye on the market indexes (NASDAQ, Dow Jones, S&P 500, NYSE, etc.).

I would recommend looking at the movement of at least 4 indexes on a daily basis.

Some will fluctuate up or down but it’s generally a red flag is they all begin to fall. Any changes up to 4% are not usually a trigger.

You might be thinking daily monitoring is a lot of work but you’d be surprised how quickly the market will turn.

To avoid losing money, take a minute each day to scan the market trends. Try making it part of your morning routine to check the indexes as you have your coffee.

Before we move on to the next tip, you should know the market is predictable.

stock market lifecycle graph

A bull market will always be followed by a bear and then again by a bull.

Periods of growth are followed by periods of recession. It sounds dark, but historically, this has been true. It’s a normal part of the market’s lifecycle.

So, don’t be surprised by the next bear market, stay current with the movements of the indexes!


2 – Stay away from speculative trading

We all have those friends who tell us that they think we should trade certain shares. That we should buy now because the price of Company X is falling and it has to go back up.

Stock market chatter is never-ending. Keep in mind, that gossip is just someone’s opinion. Opinions which are often generated out of a broken telephone.

What I mean is, each time information is exchanged from one person to the next, it is slightly modified during the exchange. This can be due to differences in interpretation, lack of understanding or “story embellishment”.

How many times have you heard the same friend tell the same story but each time some detail seems to be slightly different?

Proceed with caution when taking advice from friends who think that XYZ will happen because someone else told them.

There is no way of predicting the market. You’re usually better off making your own assumptions (based on research, recent press releases, industry trends, etc.).

What “people” talk about will often involve a high amount of speculation. Chatter revolves around hot gossip and companies in the headlines. They become the news of the hour because they’ve gone through some kind of significant change (resulting in prices either going up or down).

For example, why is everyone talking about Bitcoin now when they’ve been on the market since 2009?

Bitcoin has blown up, investors have made and lost millions. That’s the reason we talk about it so much and why there are so many different opinions on whether you should buy or sell.

Generally, if something has made the headlines, then it might already be too late to invest. If it isn’t, these kinds of investments are usually highly speculative.

There is an argument to be made that speculation can lead to higher returns, but the opposite is also true and they can lead to significant losses.

Avoid the latest trend, invest in more stable companies

We haven’t really covered the second part about investing in more stable companies but it goes hand in hand with avoiding the latest trends and “he said she said” advice. If you don’t want to risk losing money on the market, invest in more stable companies, don’t jump on what’s trending.

You might be thinking but share price of stable companies like Netflix and Apple is much higher.

Unfortunately, yes, but it’s higher for a reason. The chance of losing everything you put in is minimal compared to less historically stable companies. You might not be able to make as much in a short amount of time but your investment will grow in the long-run.

Take a look at just a few of the examples below. They all experienced spikes (up and down) but there is a clear long-term growth in all of them. This long-term growth is generally a good indication of future growth.

share price growth graph for microsoft, netlfix and apple

I’m not advising you invest in Microsoft, Apple or Netflix but you should be able to see stable historical growth in whichever companies you choose to invest in.


3 – Don’t buy when the share price is falling

You might receive advice to buy shares when they’re falling but in reality, no one knows when or even if prices will go back up 

You might be looking at an investment which went from $100 per share to $50 per share and think “it’s dropped by half, I should buy now before it goes back up”.

All though that strategy can be very lucrative, the problem is you have no idea when or if the price will go back up. Really, you’re looking at any of the following scenarios:

  1. Maybe you get lucky and the price goes back up shortly after your purchase – hooray! you made money
  2. What if you bought at $50 per share but it dropped to $20 per share before it started climbing again. It’s not the end of the world but you certainly could have made more buying when it started to climb again (say at $30 instead of $50). Not to mention that you’re reducing the risk of losing money if you buy when prices are going up rather than down.
  3. The company you invested in couldn’t keep up with its industry and the share price dropped because it was getting squeezed out of the market – sorry, in this scenario, you’re loosing money if not all. This was the case for a lot of investors who saw an opportunity when Blackberry’s shares dropped from CAD$137 to half within a few months. Problem was, Blackberry couldn’t keep up with its competitors and it got squeezed out of the industry. The share price never recovered.


Don’t buy when the price is tanking; buy on the rise after a price drop


Final tips and advice

To sum it all up here are my final tips to avoid losing money on the market:

  • diligently check the latest news for the companies you invested in, their industry trends (are there significant changes in the industry dynamics? any new competitors on the rise?)
  • keep an eye on the market as a whole and avoid holding investments when the next bear market hits
  • avoid buying into “he said she said” advice and build your own assumptions through research (company history, industries dynamics, etc)
  • avoid investing in the latest trends which are usually speculative
  • favor investing in historically proven companies with stable growth

Please bear in mind that these are high-level investment concepts and there are a number of additional factors to consider in making investment decisions which should be analyzed on a case by case basis.

Please be sure to speak to a financial advisor and if you should have any questions, reach out to me on a consulting basis.

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