The stock market is a tricky beast. It seems to wildly reward some investors while others struggle to turn a consistent profit.
It almost appears that winning investors possess some magical or psychic ability to earn long-term wealth from the fickle stock market. Even in massive bull runs like last year's, only some investors build wealth while the most fight to simply match market returns over time.
Having known and spoken with hundreds of investors from all walks of life, I have discovered three reasons why the vast majority fail to ever earn real wealth in the financial markets.
Believe it or not, the reasons have little to do with market knowledge or possessing some rare form of talent. And with a few changes here and there, any investor can overcome them.
What's Holding You Back
1. Lack of Patience
Nearly everyone in our accelerated culture wants instant gratification and struggles to be patient. Having access to instant information, a 24-hour global news cycle, and thousands of pundits making reasonable-sounding arguments for every investment opinion has investors rapidly jumping from one idea to the next.
The slightest downward move in a stock's price or the market results in the majority of investors panicking out of positions and jumping into the next hot idea.
One way I remain patient is to always keep in mind that the overall stock market has an inherent upward drift. In other words, stock indexes consistently move higher over time. Sure, there will be periods of negative returns, but the overall nature of the stock market is to move higher. Just look at any long-term stock market chart, and you will see exactly what I mean. Understanding this fact is an excellent way to maintain your patience when investing in overall market indexes through market-tracking exchange-traded funds.
Lacking the fortitude and patience to stick to your plan during adverse market moves is a primary reason you are not a wealthy stock market investor. I am certainly not suggesting holding onto stocks regardless of what happens with the share price. What I am suggesting is to stick to your plan and honor your stop-loss orders when investing in the stock market.
Work on being patient. The stock market is not a get-rich-quick game but rather a long-term commitment that can lead to substantial wealth.
2. Not Reinvesting Dividends
Many investors simply keep dividend earnings as cash in their account. By doing so they're missing out on the best way to maximize returns over time.
Dividend reinvestment simply means reinvesting dividend proceeds to purchase more shares of stock. In doing so, investors can benefit from the power of compound interest, growing their wealth at an ever-increasing rate.
Compound interest is one of the most powerful forces in finance. When used correctly, it can accelerate your journey toward wealth far beyond simple stock price appreciation. And the primary way stock investors can capture the power of compound interest is through dividend reinvestment.
3. Lacking A Plan
The majority of investors do not have a long-term investment plan. Sure, some outliers become wealthy just by luck, but the vast majority of long-term successful investors have a written plan of action to help keep them on track.
A plan helps you to focus on the goal of building wealth. Without a plan, it is very easy to take profits too fast, make impulse buys, and not stay in the game long enough to build real wealth.
An investment plan lays out how much you will invest each period, how it will be invested, and your investment strategy. Knowing these things in advance helps control urges to do things contrary to your long-term goals.
Risks To Consider: Even by consistently managing the above three factors it is possible to lose money in the stock market. No set of rules or strategies can eliminate all risk when investing. Always use stop-loss orders and prudent position sizing.
Action To Take: Take a close look at your investing habits to determine which factor are holding you back from earning real wealth.