This Points Out One of the Greatest Flaws Existing In Most Investors

Earlier today, a friend of mine had shared a passage from an article with me. The passage highlighted a huge flaw which exists in the psyche of many investors.

The gist of the passage is this: When the market’s climbing, most investors will brag loudly that they’d be happy buyers of stocks when their favourite investments fall. But when stocks actually start crashing and push comes to shove, many of them can’t bring themselves to buy and would rather the crash not happen.

Speaking from my own personal experience, I can relate to the message. It’s true that whenever I see my stocks rise in price, I’d be confident that if they fall in price again, I’d be buying more. Yet when the time comes (something like now, with the Straits Times Index (SGX: ^STI) close to 20% lower than where it was just five months ago in April), I find myself becoming too selective and cautious in choosing which stock to buy more of.

Thing is, this affects most of us. As humans, we are hard-wired to fear losses more than we appreciate gains (this is something called loss aversion).

So, when stocks are falling, the fear of making losses may override our logic and cause us to procrastinate buying decisions, ultimately leading to missed opportunities to invest at lower prices and better values.

Foolish Summary

We can’t shake off the aforementioned psychological quirk – it is part of what makes us human. But with constant reminders, we should be able to spot instances when we’re displaying irrational behaviour and thus counter the problem.

The passage shared by my friend has made me aware of how I can improve my own investing. I hope I can do the same for you.

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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 Stanley Lim does not own shares in any companies mentioned above.