4 Investment Mistakes to Avoid in the Stock Market

For most people, investing is simply about making money in the stock market.

However, avoiding losses can be just as important as making gains. If we can reduce the frequency and severity of our investing mistakes, we may just set the stage for us to generate good returns in the stock market.

Mistakes can come in many forms. The hardest ones to avoid may be psychological in nature. Here are some to be aware of.

Mistakes No. 1 to 3: Confirmation bias, anchoring bias, and hindsight bias  

I have written about the confirmation bias, anchoring bias, and hindsight bias in earlier articles. You can catch them in herehere, and here respectively.

Mistake No. 4: Survivorship bias

In his book Your Money and Your Brain, author and financial journalist Jason Zweig described survivorship bias:

“The technical term for counting winners and dropping the losers is “survivorship bias” (because the resulting averages are biased by success of surviving companies)”

In other words, survivorship bias is the act of describing your success by remembering only your winners while sweeping all your losers under the rug. In doing so, you may miss the opportunity to learn from your mistakes and may thus be prone to repeat them in the future.

Measuring your long-term performance – with both winners and losers included – can also help you understand where you stand as an investor. As my colleague Stanley Lim notes:

“Before we start worrying about which investment to buy and how to construct our portfolio, an easy way to become a better investor is to start by looking at our investment results the right way – in percentage terms on an annual basis. “

Comparing your own investing performance against the returns of the Straits Times Index (SGX: ^STI) would be a way to figure out where you stand as an investor and subsequently, how you can do better in the future.

A Fool’s take

Some mistakes can be obvious, and some may not be as obvious.

The quartet of biases above may fall in the latter form of mistakes. If we can be aware of our own biases, we may save ourselves from committing errors that may have been avoidable.

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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 contributor Chin Hui Leong doesn't own shares in any company mentioned.