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10 ways to lose money trying to beat the market

Image of an old man who has lost his money

Most people are best off using index funds to achieve their investment goals. They do not have the edge required to beat the market, and most fund managers they’d pay to do so can’t either, especially after costs.

However some of us love the art of investing, a challenge, suffering, or just the thrill of trading shares. So we invest actively, despite the odds.

If you don’t mind that you’ll probably lag the market return, there are worse hobbies. Provided you’ve made adequate financial provision overall, of course.

A very few of us might believe – or even have the stats to show, if we squint a bit – that we do have a market-beating edge. This might make stock picking for us rational as well as intellectually rewarding.

Even then, as my friend Lars Kroijer often reminds me, it’s a good idea for any budding Warren Buffetts with a smaller than seven-figure portfolio not to think about what the time and effort of picking shares is costing in terms of an hourly rate. Or indeed the better job or business you could pursue instead of doing all that share research.

But you (hopefully) knew all that already.

10 easy ways to lose money trading shares

If you have the rare ability to pick investments better than the market – on average – or you have reason to want to try, you’ll still need good workaday habits to make your skill pay.

There are lots of big, hairy ways to lose money when investing in or trading shares and funds.

Rubbish investment selection is route one to a lousy result, no doubt.

Other common mishaps include getting scared into selling when shares fall for no real reason, or becoming over-confident and losing whatever discipline had been delivering for you. (Your biggest enemy in the market is you.)

Even if you master your emotions and make winning investments, you can still erode your returns by bleeding money through a bunch of bad habits.

Here are ten active investing mistakes that will eat away at your returns, and make beating that tracker fund even harder.

1. Paying high fees

There’s no reason to pay a lot to buy and sell shares today given the existence of no-cost share dealing from the likes of Freetrade.

Freetrade offers ISA, too, and a SIPP is on the way. With such tax shelters you can trade however you want without worrying about capital gains taxes or submitting paperwork to HMRC.

Even at traditional brokers, online dealing is cheap compared to the old days. Fees probably won’t be what determines your success once you have a big pot to invest.

Small active investors need to watch expenses like a hawk, however.

If your broker charges £15 to buy and sell shares, then a round trip will cost you £30 in fees. With an investment of £600, you’ve lost a whopping 5% on dealing fees, and more could be due on stamp duty, too. Even investors with edge will struggle to make up that friction.

Keep total dealing costs below 2.5% – and preferably far less. Use Freetrade or a similar low-to-no cost app to slash the price of entry.

If for some reason you do want to use a more traditional broker, then find a platform with a Sharebuilder type service that offers very low dealing fees (say £1.50) at set times, if you really must buy small quantities of shares.

2. Buying shares on wide spreads

The spread is the difference between the price you pay for a share, and the price you can sell at. Think of changing foreign currency at an airport booth as an analogy.

Even today you can find small cap shares on a five to 10% spread. You’d need the price of your investment to rise by at least that much just to break even – so you’re starting in the hole.

You must be especially confident a share is undervalued to buy on a large spread. Preferably you’d be in for the long haul to amortize away the initial cost over time.

Try using a Limit Order to buy such shares cheaper than the quoted price. Some brokers may claim higher dealing fees are justified by their ability to bag shares within the spread. Test them!

3. Fat-fingers making you buy the wrong share…

…or too many shares, or too few.

It happens! Online dealing has made trading cheap and easy, but if you’re too freewheeling you can slip up when placing your order.

Double check your trade is for the right shares after you’ve entered a ticker. It’s easy to make a mistake if you’re careless, especially when buying shares (or bonds) that have similar names, or multiple issues or classes.

With highly-priced or penny stocks, be careful to check you’re investing the correct amount. I’ve seen brokers fail to give the right price for some (admittedly typically obscure) shares until the final order screen.

4. Ignoring the tax implications of overseas holdings

I’m not going to begin to go into this vast subject here. Prior experience is that any attempt to do so will over-simplify this or overlook that. (And then someone will pop up in the comments and call me ignorant for not knowing there’s been a bilateral withholding tax refund treaty in place due to the legacy of the Statute of 1736 provided you deal in a SIPP on a Tuesday and send a copy of your birth certificate to a man in Panama.)

Do your own research on things like the tax implications of foreign dividends, the domiciles of different funds you own, and any circumstances specific to you, such as investing as an expat.

5. Being forced to deal due to tight stop losses

I don’t like stop losses very much unless you’re literally a day trader (and good luck with that) but I really don’t see the point in automatically selling shares if they drop by 3-5%.

Occasionally such a tight stop loss will prevent you taking a big hammering when a share plunges in price. Mostly you’ll just be selling because of market noise. You may quickly want to repurchase your shares – probably after they’ve risen again and you’re kicking yourself.

Trading fees can quickly mount like this, not to mention your blood pressure.

6. Ignoring liquidity

Shares that are thinly-traded can be a fertile hunting ground for small investors. They may be overlooked by professionals or untouchable for some reason, usually size. But they can come with a sting in the tail due to poor liquidity.

One sign of illiquidity is a wide spread. Another is that buying just a few thousand pounds worth of shares moves the price. Even little old me has moved the valuation of quoted companies by millions with small trades.

The price of illiquid shares can be as unpredictable as a former child star who has gone off the rails, so make sure you know why you’re invested to keep the faith. Don’t be overly worried by short-term movements if you’ve bought for the long-term.

Don’t even think about selling illiquid shares in a bad market. You’ll usually get a terrible price, followed by the pain of seeing the shares rebound when the market calms down.

7. Using too much leverage

This one is for the spreadbetters. Make sure you understand how the size of your bet per point equates to your total exposure to underlying share price moves.

Sensible folk who would never dare borrow £5,000 to buy shares can easily – and accidentally – rack up such exposure with their first spreadbet.

I’ve used spreadbetting in the past for specific reasons (and there can be tax advantages) but I’ve not done so for years. I believe most private investors are better off sticking to traditional investing.

8. Ignoring currency impacts

As a long-term passive investor in a diversified basket of global shares via funds, it’s a perfectly acceptable strategy to ignore currency fluctuations.1

If you’re an active investor operating tactically and over the shorter-term, you should pay more attention to currency movements – especially the US dollar, which tends to drive a lot of other variables in the market, from emerging market debt to the gold price to the cost of energy.

Surprise events such as the EU Referendum notwithstanding, major currency pairs tend to move fairly slowly. Certainly compared to the volatility of individual shares, which can drop by 50% or more in a day.

Over a few years though currency movements add up. For example, if you spot a particular emerging market is pursuing a pro-growth agenda and you buy into its shares for the long-term, you could do worse than expected if its authorities decide to boost competitiveness by slowly depreciating their currency 30-50% versus the pound and other global benchmarks.

Remember, it’s always the currency of the underlying assets that matter when you invest overseas.

9. Paying hefty active fund management fees

One useful outcome of trading shares is you’ll soon discover it’s harder to beat the market than it looks, so you won’t have to take our word for it.

That is, provided you properly track your returns (as opposed to fooling yourself).

At this point you should turn to passive investing and get a new hobby. But despite the odds, some people will still to try to beat the market by finding winning managed funds or investment trusts.

It’s a free country, and so long as you’re saving enough and not chasing quick returns, you can still achieve your goals with under-performing active funds, if you really must keep alive the small chance of doing better in the end.

Do make sure you appreciate the affect of fees on your returns, though.

  • £100,000 invested for 20 years at a 10% return with annual fees of 1% compounds to £560,441.
  • With a very slightly higher annual charge of 1.5%, you’ll end up with nearly £50,000 less.

It’s usually best to favour funds with lower fees – even active ones.

Fees buy active managers their sports cars. These managers are not bad people – most are fascinating company if you’ve got the sort of curious mind that’s drawn to active investing – and they work hard.

But as a group they fail to beat the market for the money we give them.

That’s inevitable, because active investing is a zero sum game.

10. Not using ISAs and pensions to shield yourself from tax

Paying taxes on your gains or dividends can savage your returns. There’s no excuse nowadays for not dealing within ISAs or a SIPP2.

The environment for unsheltered investing has got more hostile over the past few years, such as with the escalation of taxes on dividends. A hike in capital gains taxes has been mooted, too.

By all means ignore tax shelters if you want to give the State a big chunk of the gains you make for the risk and effort of investing in shares.

Personally I prefer to (and gladly) pay my share of taxes on my income, and to leave my investments to compound unmolested.

Beating the market is very hard. Don’t make it even harder for yourself by doing it on behalf of HMRC!

  1. Any overseas fixed income investments, such as US government bonds, should usually be owned via a hedged ETF or similar. You can do the same with shares if you want to, at a potential small cost to your returns. []
  2. Self-Invested Personal Pension []
{ 14 comments… add one }
  • 1 JS December 3, 2020, 1:56 pm

    I have an account with Interactive Investor with share holdings in a couple of companies. I have no interest in any further trading (main investing now is simply monthly into a Vanguard world index) and am simply holding them there in the hope they one day rise from the ashes after having lost quite a bit on them and I don’t want to sell and crystallise the loss. ii charges me £9.99 a month as an account fee. Is there another platform I can transfer them to and avoid paying the monthly fee (or at least with a lower one)? Best wishes.

  • 2 JDW December 3, 2020, 2:53 pm

    Good piece.

    I am about five years into my investing journey (I’m mid 30’s) and didn’t really start to save anything until 2015 or so when I started a workplace pension. I feel like I’ve learnt a hell of a lot in the last two years while trying to put aside 25%-30% income into my S&S ISA, sometimes more, with the aim of ‘retiring’ at 50-55, which is in reality is escaping the workplace and having the freedom to do other things. A few years ago, being really new and naive to it all, I was chopping and changing my portfolio frequently, thinking I could pick a stock on a whim and double my money in a day (I did this, through luck rather than judgement on one occasion, but have got stung with other companies – no more!) without any awareness of the impacts of the costs of trading, the cost of platforms, management costs etc.

    Since 2017/18 or so, I have built my portfolio (S&S ISA and SIPP) to around mid- five figures, shifting gradually towards a mainly a mix diversified index funds, ETFs and a few relatively cheap managed funded with a portion of (hopefully) solid dividend-paying defensive shares and ITs, all with reintevestment instructions, with the aim of getting rich slowly. This website has been invaluable in my learning process.

    I am probably around a few months to a year off looking switching platforms away from a fixed % to a flat fee platform, once my monthly charges exceed the £9.99 monthly fee ii charges. (In this case I’m looking at switching from HL charging 0.45% on my ISA and SIPP accounts, probably to someone like ii) – a question for JS above, given that he is currently with ii, that can probably be answered better by others, is to look at your charges and holdings and compare these across potential platforms – it really depends how much you have in your portfolio. You could benefit from being in a % fee broker or platform, depending on how much you have, but will likely benefit over time being in a flat-fee platform opposed to a % one once your portfolio grows above a certain threshold and don’t trade regularly. When I make the likely switch to ii, I plan on keeping regular investments up monthly (they don’t charge for these), with the odd additional extra fund/share purchase in line with the one trade a month they give you. Researched it a fair amount and think it is on balance the best platform moving forward, capped at a current maximum of around £240 per year, regardless of how my portfolio hopefully grows in the future. But there are lots of options out there. Good luck.

  • 3 ZXSpectrum48k December 3, 2020, 5:07 pm

    Your dislike of (tight) stop losses somewhat odd. Clearly the stop-loss has to be a function of the volatility of the underlying. There is no point placing a 3% stop-loss if the underlying is moving 1%/day and the trade’s time horizon is 3 months – you’re going to get stopped out by noise, not signal. That’s obvious.

    Nonetheless, in my experience it’s far easier to construct strategies with high payouts/convexity than the actually try to call the market. I also don’t see how you maintain risk discipline or generate a decent Sharpe without a stop that is only a fraction of the target take-profit move. If you wanted a Sharpe of 2 and set targets and stops symmetrically, trading with a time horizon of 1 month, then you’d need a success rate of 86%. This is unrealistic. With a 2:1 ratio (10% target :5% stop), the success rate comes down to 68%, much more feasible. At 3:1, it’s 62%, which is quite achievable.

  • 4 Hariseldon December 3, 2020, 11:41 pm

    Hargreaves Lansdown charge no custody fees on shares or ETFs in a taxed share account.

    My experience suggests that when you have a couple of duffers in your portfolio, you have two choices.

    One ask yourself the question would I buy this share at its current price now ? If no get rid of it, they are a continuous sore and reminder of an error, you’ve taken the high road with a global tracker, take the hit and you have learned a valuable lesson.

    Two, hope it recovers enough to break even and then you sell it and say I didn’t lose any money… this doesn’t justify the original purchase… you’ve kidded yourself, you’ll do it again.

  • 5 xxd09 December 4, 2020, 9:52 am

    Ideally at the start of your investment career you put your money in a global equities index tracker and go from there
    Certainly a possible scenario now for the younger investor who cares to learn about investing via reading,financial blogs etc
    However most investors still seem to have to invest and lose to reach this happy scenario
    Hands on trading is a very educational experience akin to gambling
    Most exit having learnt the lesson that trading shares is a losers game like gambling
    Until finance and investing is taught in schools this will probably be the way most investors learn
    Hopefully sooner in their investing career than later
    Great article

  • 6 Geoff December 4, 2020, 11:01 am

    @JS have a look at iWeb £25 initial fee and then free. Make sure you can hold your particular investment with them first.

  • 7 Passive Pete December 4, 2020, 11:13 am

    I too was a little surprised by your view on stop losses. I’ve only recently started using them following my reading of the book you recommended, The Art of Execution. I don’t always have my ‘finger on the pulse’ and so the first I knew about the recent slide in oil majors was when HL sent an email saying a trade has been made. That got my attention and I had a bit of a rebalance of the active section of my investment portfolio.

  • 8 Whettam December 4, 2020, 11:23 am

    3. Re fat fingers I’d add if you have an ISA and SIPP with same broker, make sure you are buying / selling from the right account, *blushes* I confess have got that wrong once!

    I have recently been hit by a combination of 2 / 10, over the last 4-5 years, I did not really get my holdings right between accounts, so for example my ISA had most of my property allocation and UK funds / IT’s. This was on basis yield was higher and long term this might be useful. Conversely my pensions had my global trackers and active global funds, this has meant my pension has relatively, done much (much) better than the ISA, so I may well hit LTA. Therefore in process of moving assets from pension to ISA, so effectively paying spread twice 🙁

  • 9 flotron December 4, 2020, 3:24 pm

    @Geoff – Just a note, but from 4th Jan 2021 that initial fee will be moving to £100. So worth getting on with it if anyone is interested

  • 10 Gentleman's Family Finances December 5, 2020, 8:52 am

    A good summary of some obvious and not so obvious pitfalls.
    Avoiding losing money is probably the best financial advice for anyone and there are always ways to streamline your finances.
    It’s all about marginal gains.

  • 11 Pedro December 5, 2020, 10:32 am

    @flotron – thanks for the heads up; does everyone find iWeb ok? Seems I could shave a few pounds of dealing/custody charges off vs Youinvest.

  • 12 John M. December 5, 2020, 2:55 pm

    I have a different take on ‘timing the market,’ for the following reasons:

    With a fair amount of luck in the timing, I sold my shares about a week after the market peak of just under 2 years ago. I also completed the sale of my last investment property just before the lockdown earlier this year.

    I retired early over 3 years ago and will not make any future losses back from an employment salary. It’s a decision I am comfortable with.

    My pensions (taken early) will provide for me meantime, until I decide to reinvest.

    I’m not posting this as advice for others, as it may be unsuitable for them. It’s merely down to the fact that I believe sooner or later, we will have a once-in-a-lifetime financial crash and anyone that is cash rich and in a position to act on this will do well.

    Yes, in real terms I’m currently not keeping place with inflation, but it’s a price I’m prepared to pay for playing the long game my way.

    I agree that timing the market in general, is not normally advisable, but in the case of a forthcoming once-in-a-lifetime crash (at least in my opinion), it makes sense to me.

  • 13 Dividend Power December 8, 2020, 9:51 pm

    Good advice. Today, I think that many brokerages are offering commission free trades. High fee active mutual funds are not really competitive. Better to stick with index funds with low ER.

  • 14 Geoff December 9, 2020, 1:31 pm

    @Pedro I’ve used iWeb for five years with no problems but I only use them to hold a lump sum invested in an ISA with only a couple of global trackers in it. Before you decide to use them make sure you can deal in the in the investments you want, they can be a bit limited but better lately I understand.

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