Why do investors lose money?
There are lots of reasons why we lose money — and no one is immune to it. I would chalk up a majority of capital losses to emotional discomfort.
Let say you’re investing in company A.
The company looks great, and their financials seem solid. However, the market they’re in isn’t getting a lot of attention. In fact, this market is getting bad publicity if anything. Analysts are telling everyday punters to get out of the market, causing share prices to fall.
I would wager that most investors who are playing with sums they can afford to lose will also sell. Why? Because they don’t like seeing their portfolios go into the red. And this could very well be the best thing to do. Generally, market wisdom suggests you should sell your losers and keep your winners.
But as soon as you sell out, you find company A’s share price has jumped; it goes on to climb even higher over the next year. You don’t bother getting back in because you had already made a loss, believing it’s too late to get back in.
This situation happens too often to count. Market noise will scare investors from the market, ensuring they lose money when they could have made substantial gains.
When I was an intra-day trader the same thing happened. But, instead of it taking place on a daily, weekly or monthly basis, I experienced this on a second-to-minute basis.
Price action was rapidly changing, and the fear of losing more — or missing out — sometimes seemed too great. I learnt the hard way that, trading even with small amounts, emotions still cause us to make irrational decisions.
Now, imagine if you had an app that invested for you. Not big sums, but small sums of $30 dollars a month. It would be a pure set and forget investment.
Well this app already exists. The US app ‘Acorns’ helps thousands of people invest small amounts of money (which they call acorns). And their investments, over time, turn into thousands (or large trees).
Acorns provide five smart portfolios, ranging from conservative to aggressive. The app has received nearly 70,000 downloads in just over two months, beating its own expectations. Acorns symbolises the rising Australian interest from overseas financial technology players.
Australia’s alternative finance lending market (valued at $348 million) is the third-largest in Asia-Pacific. In 2015, the market grew 320%, according to research by accounting firm KPMG.
‘The market potential is very, very significant in Australia,’ said Cath Rogers, investment director at Sydney-based AirTree Ventures, which invests in Fintech companies.
The government is supportive: it wants to develop Sydney as a FinTech hub. They hope Sydney might become Australia’s answer to Silicon Valley. They’ve also announced tax breaks for early-stage investments, as well as a visa scheme for entrepreneurs to attract talent.
But this move towards FinTech could pose a threat to Australia’s biggest lenders — the banks. However, it seems these tech start-ups are planning to play nice with our Big Four lenders.
Rogers firm is backing a Sydney-based online lending business called Prospa. Prospa has a referral tie-up with Australia’s third-biggest lender, Westpac Banking Corporation [ASX:WBC].
And, earlier this year, US online lending firm On Deck Capital [NYSE:ONDK] entered into an exclusive partnership with Australia’s second-biggest lender, Commonwealth Bank of Australia [ASX:CBA].
So while there are market commentators saying that banks need to adopt a digital culture, banks may already be in the process. The increased use of FinTech could bring about a new dynamic to how we think about investing.
Junior Analyst, Money Morning
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