9 Mistakes That Make Stock Investors Lose Money

Why do stock investors often lose money even when the market is rising?

Actual investor returns depend on trading behavior, not just market movements. This is what DALBAR — an independent research organization in the United States — has continuously measured over the past 30+ years in its Quantitative Analysis of Investor Behavior (QAIB) report.

In 2024, the S&P 500 rose 25.02%, but the average stock investor achieved only 16.54% — a gap of 8.48 percentage points, the second-largest in a decade. Over a 20-year average, the market gained 10.35%/year while the average investor achieved only 9.24%/year. This gap is called the “behavior gap” — lost profits not from selecting the wrong assets, but from buying and selling at the wrong times due to emotions.

Notably, even in 2025 — when this gap narrowed to just 0.72 percentage points, the lowest since 2012 — the market recorded a record net withdrawal of 2.3% of assets from stock funds in just July 2025, precisely during a period of high volatility. This shows that the behavior of “withdrawing money at the wrong time” persists stubbornly, regardless of market phase.

For experienced investors: it is worth noting that DALBAR’s behavior gap is calculated based on dollar-weighted returns (net cash flows in and out of funds) compared to the time-weighted returns of the index — meaning it reflects the actual timing of when investors put money in and take it out, not just simple average performance.

9 Most Common Behavioral Mistakes by Stock Investors

1. What is Loss Aversion and why do investors “hold losses”?

Loss aversion is a psychological tendency in which the pain of losing money feels roughly twice as strong as the pleasure of gaining an equivalent amount — a classic finding by Kahneman and Tversky in “Prospect Theory” (1979). In investing, this causes investors to hold losing stocks and wait to “break even”, rather than cutting losses according to their original plan.

Real-world example: In late March 2022, when news of stock manipulation by a major real estate conglomerate spread, related stocks were heavily sold off, with some codes “blank on the buy side” — no buyers — for multiple consecutive sessions. Many investors who had bought at high prices earlier chose to hold rather than cut losses early, turning initial losses of 20–30% into a loss of most of their account value.

2. What is the Disposition Effect?

The disposition effect is the tendency to sell profitable stocks much more frequently than selling losing stocks — regardless of whether it is the right time to do so. This finding was published by researcher Terrance Odean in 1998 in the Journal of Finance.

A very familiar situation: an investor holds both bank stocks and real estate stocks. The bank stock up 15% is cashed out almost immediately “for fear of losing the gains already made”. The real estate stock down 40% is held “because selling now means realizing the loss”. Years later, the portfolio consists only of losing stocks, because the good stocks were sold long ago — “sell the winners, keep the losers”.

3. What is Herd Mentality and FOMO in stocks?

FOMO (Fear Of Missing Out) is the psychology that causes investors to buy along with the crowd when they see a stock rising sharply, rather than analyzing independently, often leading to buying at exactly the peak price just before the market corrects.

Global example: In January 2021, GameStop stock traded below $20, then a community of retail investors on Reddit rallied each other to buy en masse to “squeeze” short sellers. In less than three weeks, the price soared to a peak of $483 — over 2,000% — then crashed sharply on the same day, leaving most FOMO buyers trapped.

Vietnam example: In late 2021 and early 2022, a group of real estate stocks were “pumped” continuously, with some codes rising over 1,700% in just a few months due to artificial supply and demand manipulation, attracting large numbers of retail investors to buy along. When investigative authorities arrested the ringleader for price manipulation on March 29, 2022, the entire stock group collapsed, causing confirmed losses of over 723 billion VND to investors.

4. How does Overconfidence and Overtrading affect returns?

Overconfidence makes investors believe they can continuously “catch the wave” better than reality allows, leading to abnormally high trading frequency — and transaction costs, taxes, and slippage will erode most of the gross profit.

Research by Barber and Odean (2000), analyzing over 66,000 U.S. household accounts over 6 years, shows that the top 20% of most-active traders achieved only 11.4%/year net return — significantly lower than the least-active group.

For day trading specifically, the figures are even more alarming: 97% of people continuously trading derivatives over 300 sessions in Brazil lose money; in Taiwan, a 15-year study shows fewer than 1% of investors have stable net gains after fees (equivalent to about 80% losing); in India, SEBI (2024) found 93% of individual derivatives traders lost money within 3 years; in the U.S., the ratio is around 72%.

5. What is Confirmation Bias in investing?

Confirmation bias is the tendency to only seek and believe information that supports an existing decision, while ignoring warning signals. An investor holding a real estate stock during a period when the sector faces bond difficulties will tend to only read news about “upcoming bailout packages”, while ignoring analyses warning about debt maturity pressure. This is why many investors delay loss-cutting decisions for a very long time.

6. What is Anchoring Bias to purchase price?

Anchoring is the phenomenon where the original purchase price becomes a “mental anchor”, influencing all subsequent decisions — regardless of how business fundamentals have changed. The saying “I bought at 30, now it’s at 20 so I must wait for it to return to 30 before selling” is a typical manifestation: a stock does not “remember” what price the investor bought at; the market prices it based on current prospects.

7. What is Performance Chasing?

Performance chasing is overestimating the likelihood that a trend that has just surged will continue to rise, causing cash flow to always arrive “after” most of the wave. During 2020–2021, when interest rates hit record lows and VN-Index continuously set new highs, large numbers of retail investors opened accounts and poured money in most heavily in late 2021 and early 2022 — precisely when the market was near all-time highs. DALBAR’s 2.3% net withdrawal figure (item 1) shows the same phenomenon continues on a global scale.

8. What does Lack of Diversification mean?

Many investors think they have diversified but actually have not. For example, the stock group mentioned in item 3 consists of 5 different codes all belonging to the same business ecosystem. An investor holding all 5 codes thinks they are spreading risk, but because all 5 share the same legal risk, when the scandal breaks, all 5 codes crash simultaneously through multiple consecutive sessions. True diversification requires assets with low correlation, not just holding multiple differently-named codes with shared risk exposure.

9. What are the consequences of using excessive leverage (margin)?

Leverage amplifies both gains and losses. When the market corrects, investors using high margin can be hit with margin calls and forced liquidation at the worst times, turning temporary losses into permanent ones.

Vietnam example: VN-Index peaked at 1,536.24 points on January 6, 2022, then fell to 873.78 points on November 16, 2022 — a decline of over 43% in less than 11 months. The underlying cause stemmed from a corporate bond market crisis. What made the decline particularly devastating was the phenomenon of “cross-margin calls“: when an account faced margin calls on illiquid stock groups, brokerages were forced to liquidate not only those problematic stocks but also other good stocks in the same account — meaning even investors not holding the “troubled” stocks were swept into the sell-off vortex.

What Does Daniel Crosby’s “The Laws of Wealth” Say About Investment Mistakes?

The Laws of Wealth (2016) by Daniel Crosby — a psychology PhD specializing in behavioral finance — presents 10 principles for behavioral self-management. Three principles relate most directly to the mistakes above:

• “You Control the Most Important Thing” — your own behavior, not your ability to forecast the market, is the biggest determinant of long-term investment returns.
• “If You’re Excited, It’s Usually a Bad Idea” — a direct answer to FOMO: strong excitement is a signal to be more cautious, not a signal to deploy capital.
• “Risk Isn’t a Squiggly Line” — true risk is the possibility of failing to achieve your long-term financial goals, not simply price volatility day to day.

Crosby also proposes a “4 C” framework — Consistency, Clarity, Courageousness, Conviction — to turn these principles into daily action.

How to Avoid Investment Mistakes? (6-Step Discipline Framework)

1. Write a trading plan in advance — specify entry, profit-taking, and stop-loss points before placing any order.
2. Limit risk per trade — do not allow any single position to exceed 1–2% of total account risk.
3. Intentional diversification — do not concentrate more than 20–25% of portfolio in one code; check correlation levels between holdings.
4. Keep a trading journal — record the reasons for entries and exits to objectively evaluate performance and separate emotion from decisions.
5. Control margin leverage — maintain a safe debt-to-asset ratio and have a contingency plan if called on margin.
6. Review portfolio regularly — follow a fixed schedule based on fundamental or technical analysis, not based on market sentiment.