Top 4 Mistakes Investors Make

There are tons of mistakes we can make in the stock market. In the spirit of learning from others, here’s my list of the top four mistakes (in no particular order) investors tend to commit while investing.

Having a short term focus

Not many might know this, but having a long time horizon when investing is an incredibly powerful thing for investors. A great example would be how the odds of making money in the Straits Times Index (SGX: ^STI) can increase the longer investors hold onto the index.

Given that, investors are doing themselves a disservice by focusing on the short term when investing.

Using too much leverage

Leverage is a double-edged sword. This phase has been used so often that I think it has become a cliché. Yet, market participants still see their capital destroyed time after time due to the use of leverage.  A great example we can all learn from is the experience of Rick Guerin, an investor as smart as Warren Buffett whose returns were severely hampered because of leverage.

Being overconfident

When investors start making some money in the stock market, it can create a false sense of security and cause them to feel that they can do no wrong.  This type of overconfidence is very dangerous for an investor as it can blind us to the dangers inherent in the financial markets.  An overconfident investor in the stock market is like a driver driving with a blindfold on – it is a disaster waiting to happen.

Trading too much

One of the most common mistakes investors make is that they trade too much. There are two issues with over-trading.

One, huge trading costs can be racked up, which can eat into the investor’s returns. Two, the act of frequent trading itself means that the investor is trying to outguess the market’s short-term movements. The problem is that it’s very easy to get such predictions wrong – and not even the “experts” are immune either.

A classic study done by finance researches Brad Barber and Terry Odean on more than 65,000 households in the U.S.A also showed that the ones who trade the most ended up under-performing the market by 6.5% annually. That’s a huge penalty to pay for trading too much!

A Foolish thought

These are of course not the only mistakes investors can make (trust me, there’s plenty more!), but it’s still a good list for investors to start with. The first step to solving a problem is to be aware that there’s an issue in the first place. Hopefully this list of mistakes can help investors identify areas where they can improve upon.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any company mentioned.