Handelsblatt: These are the 10 mistakes that investors make from the point of view of stock market psychologists

Fear is not a good advisor – and yet it exists and leads to the same mistakes of investors over and over again, according to Handelsblatt.

Private investors are experiencing one today roller of emotions. The prices on the stock exchanges are making a train of terror, the price fluctuations are huge. Most investors have never experienced a mixture of high inflation, low growth and rising interest rates. They are worried.

How should they behave now to avoid mistakes? “Behavioral finance” – the theory of behavior-oriented finance – gives the answers. According to the theory, in addition to economic factors, psychological influences also determine the behavior of investors.

The two experts, Professor Andreas Hackethal of Goethe University in Frankfurt and stock market psychologist Joachim Goldberg, describe ten strategies for avoiding the classic mistakes of investors.

First mistake: Investors lose control of price losses

According to stock market psychologist Goldberg, investors do not want to recognize when stock markets have entered a bear market – a market situation with ever-falling prices. The distribution of shares of private investors is still at a high level at present. Just six months ago, stocks were considered the only alternative, but that can no longer be said in general terms. But investors need time to realize this.

Above all, a distinction must be made between short-term and long-term investments. If you are a short-term trader – in extreme cases a day trader who buys and sells assets within the same trading day – you need to set stop-loss signals. In other words, set a minimum price at which the shares are automatically sold. Because loss control is existential.

Day traders sometimes make 70% of the right hits, and yet pull down the losses of other positions in case of violent price movements. The situation is different with long-term investors, who have always ended up in profits all these years.

Second mistake: Losses are more pronounced than gains

According to Goldberg, it applies to all crises that markets recover after a certain period of time. Sooner or later, growth returns. Following the bankruptcy of investment bank Lehman Brothers – the culmination of the financial crisis – many people were tired of the stock and wanted to see evidence that things would improve. Before they want to react, prices should rise. But in this way, they usually waited a long time and missed a good moment to enter the market.

It is not logical and sober analysis that determines behavior, but heuristic methods, that is, predetermined standards for evaluating a reality that can only very rarely be considered in all its important aspects. The laziness of thought plays a role, as does familiarity, the need to organize what is happening in the world into a plausible story, a narrative. According to Goldberg, this had already been demonstrated by Nobel laureate Daniel Kahneman.

The most important finding, however, is that losses are felt on average two to two and a half times more strongly than gains of the same amount. This is why most people have an aversion to harm and therefore prefer to look for arguments to stick to harm strategies. Corrections are often misinterpreted as a reversal of the trend, so investors buy the downtrend and sometimes even fall into a bull trap.

Mistake # 3: Investors tend to panic during recessions

Professor Andreas Hackethal wants to join the choir of those who advise us to stay calm and wait. If investors were in a recession, they would limit their losses, but when would they want to come back? When will prices return to the level they were at the beginning of the year? the scientist wonders. Investors would then have lost decent returns.

Prices could fall further, but will hardly reach the bottom. So, in the long run, he says, they are more likely to be angry about going out than about further ups and downs. Incidentally, many people have reported afterwards that the fear of loss was more painful than the loss itself.

Fourth mistake: Fear leads to wrong timing in the stock market

Many investors sell at the bottom and buy at record highs. Why do investors not learn from these mistakes? Because fear is a bad advisor and the human impulse is great to be activated when danger arises and to either run or fight, says Hackethal.

And since each crisis has its own laws, you can also come up with a different story each time about why it should work this time around with the right timing. “Whatever you do now, write it down and roll out the paper again in a year to learn from it for yourself,” says the professor.

Fifth mistake: Younger investors have no experience with crises and overestimate themselves

Younger investors are only aware of the upward market, where prices are constantly rising, Goldberg points out. For example, in recent years one could often buy almost blindly and win. Such successes seduce young investors. They think that what works five times in a row always works. The phenomenon is known as the “illusion of control” – as the “Lord of the Universe”, they believe they can control everything.

The road to realizing that this is not often the case is costly. “I always recommend that you take Odysseus and the Siren Song to heart. The famous sailor had tied himself to a mast so that he could not give in to the temptations of sound. Translated into investments, this means that investors should always they maintain discipline in their dealings, even when opportunities arise. ”

Sixth mistake: the aversion to losses leads to growing deficits

Some people find it difficult to realize the losses. Instead, they expect and accumulate even greater deficits. Daniel Kahnemann and Amos Tversky called this phenomenon an abomination of loss, says Hackethal. This has two interesting consequences.

First, one should not look at one’s portfolio individually, but as part of the overall balance. Then the losses would be smaller in percentage. Because many small losses in a row hurt more than one, you should not look at your portfolio every day, but at most once a month.

Seventh mistake: Younger investors in particular are misled by social media offers

According to Goldberg, investors often look for information that matches their investments. Especially in the case of losses, there is a growing tendency for selective perception. This partly unconscious way of gathering information is especially prevalent among those who make mistakes. Then they often go to social media channels to find confirmation of their assumptions and strategies.

Mistake 8: Investors ignore news that requires review

The media is watching the crash scenarios very closely, but the high records are probably less so. What does bad news do to people? Some people make noise, others go out – that’s Hackethal’s observation.

Most people, however, selectively seek the news that supports their opinion and ignore the news that needs to be reviewed. The media may have even underestimated this search behavior and should therefore insert articles discussing optimistic scenarios.

Ninth mistake: Belief in supposed stock market truths

Stock markets are a complex issue. Is that why investors are looking for simplistic formulas like “sell in May and leave”? “Reducing complexity is an incentive, but it does not eliminate complexity,” says Goldberg.

Such slogans are based on 50 or 60 years of experience. But they are inaccurate. “Take ‘sell in may and go away.’ Does that mean you have to sell on May 1st or 30th? If there really was a rule that always applied, surely everyone would copy it.”

Mistake # 10: Short-term transactions are not successful

Financial issues are not very popular, especially among young people. Professor Hackethal sees two ways to change this behavior: “One way is from trading just-for-fun on the smartphone to long-term savings plans with stock exchanges (ETFs) or funds, if you realized that this brings greater success.” .

The other way is through smart apps that help you manage your daily finances and put more aside. Then, sooner or later, the question arises as to how to invest money regularly. These applications still need to be improved. But then they would have many opportunities for a healthy approach to everyone’s finances.