Avoid this common, costly mistake

adam_woodsThe stock market can be a very unpredictable thing for many people. While life and society are telling us one thing about where the economy should be headed, the market will be going in the opposite direction.

The market’s behavior causes the average investor to often become confused and make wrong decisions. And this is the basis for perhaps the most common reason for losing money in the stock market.

Wouldn’t you like to avoid this costly mistake?

If you were living under a rock for the past 7 months (and cut off from everything that has happened this year), where do you think the market would be if you were only shown these headlines?

  • GDP fell 2.9% in Q1 (even with the Fed printing billions of dollars every day)
  • 3 Freak Airplane Crashes: 1 disappeared, 1 was shot down, and 1 crashed in the desert
  • US housing market has stalled
  • The Fed is tapering QE
  • Israel launched a ground offensive in Gaza
  • Ukraine imploded and a piece of it joined Russia
  • The IMF and the other large organizations have downgraded the global economy
  • US & EU launched a series of sanctions against Russia
  • European Central Bank took historic measures and placed rates into negative territory to stimulate their lackluster economy
  • The small-cap Russell 2000 index is down 1.5% in 2014.

Based on all of that noise, where do you think the S&P 500 is trading? Up 7%, down -10%, or flat (unchanged for the year)?

Here’s Why Most People Lose Money On Wall Street:

The vast majority of people surveyed would choose down, and some might choose flat. Very little, if any, would choose up. Meanwhile, the S&P 500 is up +7% this year and flirting with new all-time highs! That is why it is extremely important to trade on what we see happening and not on what we think will happen.

Why Does This Happen? The Market Looks Forward, Not Backward:

The reason why this plays out time and time again on Wall Street is that the human mind focuses on the past, with very little focusing on the future (let alone a positive future). That is the key difference- everything mentioned above has already happened or is still happening, but does not reflect what will happen tomorrow.

This is one reason why so many investors have trouble with fundamental analysis. They look at the company’s earnings, sales, p/e ratio, etc., but then have a very hard time making money trading the stock. The primary reason is that the market looks forward, not backward. So next time you buy or sell a stock, ask yourself, “am I trading on what I see happening?” If not, you might want to think twice about making that buy or sell decision.

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