To The Moon

Do you ever feel like you spend hours researching investments, tracking news, analyzing data, and studying technical analysis, yet your portfolio performance remains mediocre—or worse, you're losing money? You might wonder if you're just not skilled enough or if you should quit the market altogether. But the issue might not be a lack of effort. Instead, you could be falling into common behavioral traps that snare many investors.

Let’s explore the five habits that often lead individual investors to lose money. By avoiding these, investing can become simpler and more stable. This content draws from a well-known research paper titled The Behavior of Individual Investors, which compiles global data to reveal the behavioral pitfalls that everyday investors frequently encounter.

Understanding the reasons behind these behaviors can help you make better decisions and increase your chances of becoming a steady, long-term investor. The 50+ page report covers many aspects, but I’ll summarize five key points that I find critical.

1. Poor Performance of Individual Investors

Research shows that most individual investors underperform the market over the long term. For example, studies by Barber and Odean found that U.S. retail investors’ annual returns lag the market by an average of 1.5%—and that’s before factoring in transaction costs like fees, bid-ask spreads, or taxes. The more frequently investors trade, the worse their performance tends to be. They try to control the market but end up being led by it.

For instance, the top 20% most active traders in U.S. discount brokerages had an average portfolio turnover rate of 258% per year. After costs, their annualized returns were significantly lower than those of less active, buy-and-hold investors. 

In Singapore, for example, look at how much margin debt was wiped out in April during Trump’s tariff announcements. 

Many retail investors got stuck in underperforming stocks and missed the rebound. Why? Research points to poor stock selection: investors tend to buy stocks that underperform and sell those that later soar, a pattern called “reverse stock selection.” Studies from the U.S., Finland, and Singapore confirm this—individual investors often buy stocks with weak future performance and sell those with strong potential.

The harsh truth? Frequent trading, poor stock-picking, and high costs mean most individual investors lag market benchmarks. Only a tiny fraction—like highly skilled day traders—show better results. Are you one of them? Probably not.

2. The Disposition Effect

Have you ever sold a winning stock quickly to lock in profits but held onto a losing stock, hoping it would recover? This behavior, known as the disposition effect, is common among retail investors worldwide and even affects some professionals, though it’s most pronounced in those with limited financial knowledge.

Why does this happen? People hate admitting losses—it feels like admitting a mistake. So, they cling to losing stocks, hoping for a rebound, while selling winners to “secure” gains. This ties into psychological concepts like prospect theory, loss aversion, and mental accounting (topics I’ve covered in my videos—check my channel for more). In Singapore, this behavior often shows up as a preference for high-dividend stocks to “lock in” gains.

I often hear from my friends: “Your method is great, but I’m holding a stock or bond that’s down 20-30%. I want to wait until it breaks even before selling and trying your approach. What do you think—will it recover?” The truth is, I don’t know if it will recover or keep falling. That’s why I recommend a disciplined strategy. But many investors are emotionally tied to their losing positions, unable to let go.

3. Attention-Driven Investing

Have you ever bought a stock because it was suddenly trending, hyped up in the news, recommended by friends, or topping search rankings? This is attention-driven investing. Retail investors often chase hot topics or stocks with recent price spikes, but these tend to perform well only in the short term and often underperform the market over time.

Research shows that stocks with surging search volumes may see higher returns in the following two weeks, but this often reverses within a year. If you’re trading based on platforms like Tiger Brokers or chasing “hot” stocks, check what happens when the buzz fades—often, the stock price drops too. Investors shouldn’t chase popularity like they’re voting in an election. Issuers of financial products care about hype, but as investors, we should focus on fundamentals like growth, liquidity, and diversification—not media attention.

4. Reinforcement Learning Behavior

Do you keep returning to an asset—like a stock, ETF, or cryptocurrency—because it made you money before? This is reinforcement learning, where people repeat behaviors that feel rewarding. If a stock gave you a quick profit, you’re psychologically inclined to buy it again, chasing that same thrill. Conversely, if an asset burned you, you might avoid it even if it now has strong potential.

This emotional decision-making undermines long-term returns because it prevents rational reassessment of risks and rewards. For example, I often see comments on my videos like, “Forget all this—real estate is the safest bet, guaranteed to make money!” These investors likely profited from property and are stuck in a reinforcement loop. Similarly, influencers pushing high-dividend or financial stocks often rely on past successes, implying, “Trust me, it works!” But following feelings over logic can lead to repeated mistakes.

5. Lack of Diversification

Many investors think owning a few different stocks means they’re diversified, but is that true? Research shows retail investors typically hold just four stocks, leaving their portfolios highly concentrated. Worse, they often overinvest in familiar assets—like their employer’s stock, local companies, or industries they know—ignoring international markets or diversified ETFs. This creates a home bias, where investors overly focus on their own country or region.

For example, if your income comes from a company and your portfolio is heavily weighted in that company’s stock, you’re doubling your risk. Studies estimate that insufficient diversification costs investors up to 5% in annual returns—losses that could be avoided with low-cost, diversified index funds. A well-diversified portfolio is like a sturdy building with multiple supports: it’s less likely to collapse during market shocks. Index-based investing, like U.S. stock ETFs, is the easiest way to achieve true diversification and stability.

How Index Investing Solves These Issues

Using U.S. stock ETFs for index-based investing can address all five problems:

Poor performance: You avoid frequent trading and high costs, sticking to a passive, market-tracking strategy.

Disposition effect: Mechanical investing removes emotional decisions about selling winners or holding losers.

Attention-driven investing: You focus on broad ETFs, not trendy stocks.

Reinforcement learning: Consistent index investing builds confidence in a stable, long-term approach.

Lack of diversification: ETFs provide exposure to diverse markets and sectors, reducing risk.

Final Thoughts

Which of these five traps have you fallen into? The good news is, by recognizing these behaviors and adopting index-based investing, you can avoid them. 

Start with index investing, and you’ll likely outperform the impulsive traders chasing the next big thing. How many of these mistakes have you made in the past? Let me know!

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