9 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.

Mistake No. 1: Confirmation bias – click here

Mistake No. 2: Anchoring bias – click here

Mistake No. 3: Hindsight bias – click here

Mistake No. 4: Survivorship bias – click here

Mistake No. 5: Home bias – click here

Mistake No. 6: Recency bias – click here

Mistake No. 7: The “house money” fallacy – click here

Mistake No. 8: The gambler’s fallacy – click here

Mistake No. 9: Misjudging risk

Risk can be different for each individual. Jason Zweig, a financial journalist and author of the book Your Money and Your Brain, believes that the basic human instinct for self-preservation may come into play when we invest in the stock market and contaminate our perception of risks.

This may be happening now in today’s stock market.

The Straits Times Index (SGX: ^STI) had closed below the 2,800 mark today, in the process marking a bear market with the index being more than 20% lower than a 52-week high that was reached in April this year (bear markets are defined as a 20% loss from a recent high). Judging from the decline in stocks, fear is rampant right now.

This fear may be a manifestation of how we perceive risk. When our investments are threatened by bear markets, we may see it as our livelihoods being threatened – this may then cause us to sell our stocks at inopportune moments. It’s in such times that the right behaviour can make a difference to our long-term investing results; instead of being fearful and running away from stocks, we may want to widen our eyes to spot potential opportunities.

In previous article of mine, I talked about how I had managed to find the courage to pick up units of Parkway Life REIT (SGX: C2PU) in April 2009 even while the stock market was in worse shambles than today (the stock market had fallen by two-thirds from October 2007 to March 2009).

Even with the bear market today, my investment in Parkway Life REIT in April 2009 remain more than 200% above where I bought them. And, that’s a satisfying investment return from any perspective.

A Fool’s take

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

The nonet 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 mistakes in the future 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 owns shares in Parkway Life REIT.