Why as many as 76% of eToro users lose money?

eToro informs, and actually warns its new users about the possibility of losing some of the invested money. Statistics show that as many as 76% of users lose some of the funds invested. Why is this happening?

Well, in my opinion, it is a derivative of easy access to the platform for people who are not experienced investors, and at the same time providing them with functions that can be a trap, especially for new investors. Below I will try to list a few of them.

No investment strategy

Investing without building a strategy, i.e. a set of companies that share some common feature and defining the investment horizon, usually ends up with buying random companies. Often as a derivative of how the crowd behaves. And it is known that when the crowd has taken care of something, it is rather too late to start the investment. The recent events on GameStop are a great example of such market behavior. Always having a long-term strategy and sticking to it will give you better returns.

Playing for drops, i.e. the so-called shorts

Betting a company's decline and trying to make money on it may seem like a tempting option, but in many cases it ends in a loss because trends change quickly and the market is often unpredictable. In my opinion, using this tool is also proof of the lack of a long-term strategy. That's why I never use such options.

Using leverage or borrowing funds to invest

Another tool of the "devil", which in the hands of an untrained investor usually ends in failure. Of course, with $1,000 of your money, it's fun to invest $10,000 using 10x leverage. However, it should be remembered that, firstly, it involves the cost of borrowing money and, secondly, the leverage works both ways, i.e. both the potential profit and loss will be 10x greater. This may seem safe, but as a result, it exposes the investor to a far greater risk. Rule # 1: Never borrow money to invest. Only have what you have at your disposal and you feel comfortable putting it at risk.

Patience as a derivative of a long-term strategy

Mr. Buffet once said that the stock market is a place where impatient investors give money to the patient ones. I agree with it 100%. Trading stocks on a daily or weekly basis increases the risk of not hitting the right prices far more. In addition, it tempts you with the desire to profit quickly, and this in turn usually ends the other way around. As a result, the stress associated with investing increases exponentially because the constant need to make further decisions costs more than the potential returns. Therefore, I strongly recommend taking a long-term strategy and sticking to it, or finding Popular Investors who have such a strategy and copying them.

Buying instruments that the investor does not understand or broad market indices

Understanding the behavior of tools such as gold or oil is much more complex than a specific company that has a strategy, financial results, analytical company ratings, etc. Usually, the behavior of such goods is less dynamic and definitely long-term. Just like investing in broad market indices like NASDAQ or others. Again, it may be tempting to bet on the growth or decline of the entire market without analyzing individual companies. But can it be called a strategy? Real satisfaction for an investor comes when his portfolio performs better than the market. This is because he chose the companies for the portfolio according to the key he considered to be future-proof.

Investing in too Many Positions or Copying too Many Popular Investors

In my opinion, no normal investor can monitor the behavior of more than, say, 50 companies and make decisions based on that analysis. Copying more than let's say 5 Popular Investors ends up with having more than 5 strategies in your portfolio, each of them can potentially contain dozens of positions, often scattered on stock exchanges around the world. What's more, there is practically no option to have such a portfolio under control, and in addition, it often involves additional costs of currency exchange in order to invest in various world markets. As a result, it is more an investment roulette than a strategy that we understand and agree with. Conclusion - diversification yes, but within reasonable ranges.

To sum up, we get a fairly clear picture of an investor who has a chance to be in the group of 76% who lose money on eToro. It will be a person often without an investment strategy, focused on quick profit, looking for opportunities, also playing shorts, who buys and sells shares every day, uses leverage and has countless companies in a portfolio that have nothing to do with each other.

Fortunately, it can be otherwise!

Build your own strategy or copy someone else's.

But understand what you are doing!