Why People Lose Money in the Share Market

Behaviour is a factor, but it is not the whole story

Fear and greed remain the most visible reasons investors destroy value. Panic selling during a downturn locks in losses permanently. Chasing a stock after a price surge means buying at exactly the wrong time. Overconfidence leads to concentrated bets, excessive trading, and the kind of avoidable mistakes common during market corrections. These cognitive biases are well documented and cost investors real money.

Beneath the behavioural layer, there are structural reasons most individual investors trail the broader market. These are built into the rules of the game itself, independent of temperament. New Zealand's Financial Markets Authority (FMA) has published research on behavioural biases in investing, and the findings reinforce how easily individual decision-making is overwhelmed by the systemic forces described below.

Most individual stocks lose money

This may be the least appreciated fact in investing. Finance professor Hendrik Bessembinder analysed every US common stock listed between 1926 and 2023. Of the 29,078 shares in the dataset, 52 per cent produced negative lifetime returns after accounting for dividends. The median stock delivered a cumulative return of negative 8 per cent.

If you had picked a stock at random from nearly a century of US market history, the most likely outcome was losing money.

The overall market still rose enormously over the same period because a tiny fraction of companies generated almost all of the wealth. Bessembinder found just 4 per cent of listed stocks accounted for the entire net gain of the US share market. A mere 83 companies, 0.3 per cent of all stocks ever listed, were responsible for half of total wealth creation. JPMorgan's research found more than 40 per cent of all Russell 3000 companies have experienced a decline of 70 per cent or more from their peak, never recovering.

The base rate is against anyone picking individual shares. Owning a diversified index gives you exposure to the small number of extraordinary performers driving nearly all returns. Selecting individual stocks means you are far more likely to end up holding the other 96 per cent.

The other side of your trade has an advantage

Every share transaction has two sides: a buyer and a seller. When a retail investor places an order, the counterparty is frequently a professional institution, a high-frequency trading firm, or a market maker with faster data, better models, and deeper pockets. The embedded disadvantage in most of these exchanges comes down to infrastructure.

Research by Brad Barber and Terrance Odean, using the complete trading records of the Taiwan Stock Exchange, found individual investors lose money on virtually every aggressive trade. The authors estimated retail investors collectively transferred roughly 2.2 per cent of GDP annually to professional and institutional traders. The most active traders fared the worst.

The same pattern shows up in New Zealand. A peer-reviewed study by Aaron Gilbert and Alireza Tourani-Rad at Auckland University of Technology examined the COVID-era surge in retail trading on the NZX. Using intraday data for 99 NZX-listed companies from January 2019 to March 2021, they found the influx of new retail investors reduced overall market quality. Prices became more predictable (a sign of inefficiency) and new information was incorporated more slowly. The liquidity benefits of more retail participation were outweighed by the cost of large numbers of inexperienced traders entering the market.

Popular NZ investing platforms saw membership grow from under 100,000 to over 500,000 in a matter of months during 2020, with the majority of new accounts identifying as first-time investors.

Even the mechanics of placing a trade work against the retail investor. When you buy shares, you pay the ask price. When you sell, you receive the bid price. The difference is a cost you absorb on every transaction. For a thinly traded NZX stock, the spread can be substantial.

The cost drag most investors underestimate

New Zealand's retail brokerage costs, while lower than a decade ago, remain meaningfully higher than what institutional investors pay. A retail investor buying US shares through a NZ platform faces several layers of cost: a transaction or brokerage fee, a foreign exchange fee on the currency conversion, and often a platform or subscription fee on top.

On a popular NZ platform, buying NZ$5,000 of US shares might cost roughly NZ$70 to NZ$90 in combined brokerage and FX fees. That is 1.4 to 1.8 per cent of your investment gone before the share price moves. Traditional NZ brokers charge more again, with minimum brokerage fees of $30 or more per NZX trade and currency conversion margins widely estimated at 1.5 to 2 per cent for international transactions. Institutional investors typically pay fractions of a basis point.

The aggregate effect is larger than most people realise.

In typical long-term scenarios, a 1.5 per cent annual cost drag compounded over 20 years erodes roughly a quarter of the wealth a portfolio would otherwise have produced. Costs appear in the fine print and on fee schedules, but almost nobody compounds them forward to see what they represent in lost future wealth.

Then there are the invisible costs. Every currency conversion loses a fraction to the exchange rate spread. Every market order pays the bid-ask spread. Every sale may accelerate a tax obligation you could have deferred. None of these appear on a platform's fees page, but they are all real costs borne by the investor.

Home country bias: the NZ-specific trap

New Zealand's share market represents less than 0.1 per cent of global equity market capitalisation. The NZX 50 is heavily concentrated in a handful of sectors: financials, utilities, retirement village operators, and a few large exporters. An investor holding only NZX shares has made a concentrated bet on a small economy with limited sector diversity.

Between 2020 and 2025, the NZX 50 essentially flatlined while global markets, led by US technology companies, generated returns of 50 per cent or more. An NZ-only investor missed virtually all of it. The period before 2020 told the opposite story, with the NZX outperforming international shares in seven out of ten years. Concentrating in a single small market leaves too much to chance, regardless of which period you examine.

Holding predominantly NZ shares means your portfolio rises and falls with NZ interest rates, the domestic housing cycle, dairy prices, and tourism flows. Genuine diversification across geographies and asset classes addresses this concentration directly.

Tax drag: the cost nobody talks about

New Zealand's investment tax rules are genuinely complex, and most retail investors either do not understand them or ignore them entirely. The result is a persistent, invisible drag on returns.

• The Foreign Investment Fund (FIF) regime applies to most NZ tax residents whose offshore holdings exceed NZ$50,000 in cost basis. Under the Fair Dividend Rate (FDR) method, you are taxed on 5 per cent of the opening market value of your offshore holdings each year, regardless of whether you received any income or sold anything. Many investors are unaware the obligation exists until they receive a tax bill.
• Investment structure also matters. A PIE fund (Portfolio Investment Entity) caps tax on investment income at a Prescribed Investor Rate (PIR) of 28 per cent, compared with a top marginal rate of 39 per cent on direct holdings. The headline gap looks compelling, but it narrows in practice: direct investors can elect the Comparative Value method in years when their portfolio falls, paying zero FIF tax, while PIE investors pay tax on a deemed 5 per cent return regardless. Over a full market cycle, the long-run tax drag is similar. The genuine advantages of a PIE are simplicity, zero personal compliance, and removal of US estate tax exposure on underlying US-listed assets.

Tax-aware investors also consider the timing of realisations, the interaction between dividend imputation credits and their personal tax position, and whether their investment structure is optimal for their circumstances. Over a 20-year investing horizon, the difference between a tax-optimised and a tax-naive portfolio can easily reach six figures.

The stakes get higher, but the knowledge doesn't

The average DIY investing portfolio sits at a few thousand dollars. At this level, the consequences of a mistake are manageable. A bad stock pick costs you the price of a weekend away.

The problem arrives when the same habits, the same platforms, and the same level of research are applied to a portfolio of $300,000, $500,000, or several million. A 15 per cent drawdown on a $5,000 portfolio is $750. The same drawdown on a $500,000 portfolio is $75,000. The mathematics are identical. The financial impacts are substantially different.

Marcus Mannering, Wealth and Lending Specialist at Become Wealth, sees this pattern regularly:

"When a portfolio reaches the $200,000 to $300,000 range, complexity usually begins to outpace the tools and attention most solo investors provide. Navigating FIF and other tax obligations, currency exposure, and rebalancing requires significant rigor. Perhaps most vital is the discipline to remain steady as the financial stakes grow. At this level, avoidable errors cost more than years of professional guidance."

Complexity only increases from there. A DIY investor managing $1 million across multiple platforms, currencies, and tax jurisdictions is doing a job most professional fund managers have entire teams for. The decisions multiply, the interactions between them become harder to see, and the consequences of getting any one of them wrong grow proportionally.

For many investors, the value of professional portfolio management increases sharply as the numbers grow, because the cost of a single mistake grows with them.

Even full-time professionals mostly fail to beat the market

The SPIVA New Zealand Scorecard, published by S&P Dow Jones Indices, tracks the performance of actively managed funds against their benchmarks. As of the Year-End 2024 scorecard, the results remain sobering. Over 10 years, the majority of NZ equity funds and the vast majority of global equity funds offered in New Zealand underperformed their respective benchmarks. Over 15 years, no category of active fund in any market showed majority outperformance. The pattern holds globally and has been consistent for more than two decades of SPIVA data.

In 2024 specifically, 61 per cent of the companies in the S&P/NZX 50 Index underperformed the index itself. Returns were positively skewed: a handful of strong performers pulled the average up while most stocks lagged. This is the Bessembinder effect at work on a smaller scale, even within a single year and a single index.

If well-resourced, full-time professionals with the best available tools and information cannot consistently outperform an index, the probability of a part-time retail investor doing so over the long term is very low. Stock picking and market timing are structurally unlikely to add value, regardless of conviction.

The information you consume is distorted

Every investing forum and social media feed suffers from the same distortion: people talk about their winners and stay quiet about their losers. The Reddit post celebrating a 400 per cent return on a speculative trade gets thousands of upvotes. The post about the quiet, grinding loss on a forgotten position never gets written.

Financial media and fund industry data amplify the effect. Headlines celebrate record-breaking IPOs and spectacular gains while the far more common outcome generates no coverage at all. Poorly performing funds are often merged or closed, disappearing from the historical record and making the survivors look better than the full picture warrants. The SPIVA methodology explicitly corrects for this survivorship bias, which is partly why its results look worse for active management than many industry-published figures.

For the retail investor, this creates a systematically misleading picture of what investing looks like. The visible evidence suggests picking winners is common. The actual data says otherwise.

How to keep more of what markets produce, after costs and tax

Equities remain the most reliable long-term wealth-building tool available. The systemic imbalances described above point to a particular way of investing that reliably destroys value: picking individual stocks, trading frequently, ignoring costs and taxes, and scaling a DIY approach beyond the point where it serves you well.

The evidence consistently points toward a small number of principles. Diversify broadly, across asset classes, geographies, and sectors. Minimise costs, including the invisible ones. Be aware of your tax position and structure your holdings accordingly. Recognise when your portfolio has grown beyond the point where self-management is genuinely serving your interests.

Most wealth is built by staying in the market, keeping costs low, and letting compound returns do the work over decades.

If you would like a second set of eyes on how these forces may be affecting your portfolio, book a complimentary initial consultation with one of the team at Become Wealth.