The biggest weakness of an investor is recency bias. Recency bias is a phenomenon when the investor is more mindful of the events that have taken place recently rather than things that have occurred in the past. This results in investing decisions, which are not apt and may result in losses.

An example of recency bias is making use of the patterns in the stock prices to take an investment decision rather than looking at the market behavior on a long-term basis. A stock which is falling and has recovered in the past gives a positive signal to the investor’s mind. However, only considering this scenario, which has taken place lately, and reaching to a decision to buy or sell, is an example of recency bias. On the contrary, the decision should be based on a thorough research and trend analysis.

In order to deviate from this phenomenon, as an investor, you should keep the following things in mind.

Conduct extensive research

Conduct an extensive research before investing. Perform an individual and comparative stock analysis to analyze the trends from the long-term market dynamics perspective rather than limiting it to a study of trends.

It is advisable to refer to a stock or trading journal to understand the trends for a specific stock. This would give you a clear picture of the recent trends and the rationale associated with it. Understand the company information and news and what impact it could have on the current trend. Be vigilant of any announcements by the company that may have an impact on the stock prices.

Both macro and micro economic factors should be taken into account while taking an investment decision. The trends should be analyzed in the light of both the factors rather than considering a single factor. This would form a strong base to your day-to-day trading activity.

These measures would provide a clear understanding of the stock you are planning to invest in. It would prevent you from any speculations and would help in taking an informed investment decision.

Stick to the original plan

Always stick to your original investing plan. Say, if you are investing in a specific sector, continue to do so rather than switching the sectors without any research or knowledge based on the recent activity in the sector.

Also, maintain a checklist that specifies the kind of stock you want to trade in, refer to the checklist every time you plan to invest or trade in a different sector. Do not be overconfident of your trading skills. Never try to be over optimistic about a stock you don’t have knowledge or have never traded in.

Control your emotions

This is common with recency bias. Deviation from your stable trading activity is quite normal due to sudden changes in the market situation. In such circumstances, always take a step back and think over the investment decision which you are taking, this would help you take a justified decision.

Do not get influenced by the high falls or optimistic rise. Look from the point of view of a researcher and make a decision after conducting a thorough research. The desire to get huge profits and avoiding losses may result in unscrupulous decisions, which may leave a long-lasting impact on your profitable portfolio.

Consider long-term goals

It is a general tendency to take leverage of the slump in the market. However, this may prove to be a devastating decision. In order to avoid any such things, always try to invest for long-term gains.

Long-term investment decision will lead to the following advantages.

  • Long-term investments would cover up for short-term volatility, which may result in losses.
  • Long-term investments provide for better tax coverage
  • Frequent buying and selling of stocks may attract more fees and commissions.

Invest in fundamentally strong stocks

Invest in stocks that are fundamentally strong. Devote time on research, understand important financials and ratios which gives a complete picture rather than taking a decision in solitude.

Perform a comparative study on the basis of important ratios like Price to earnings ratio, Debt to Equity ratio, Return on Equity, Current ratio, and much more. This would provide new insights into the investment decision you are planning to execute.

Above measures will help you in investing wisely in the stock market. It is essential to take these precautions while trading as the highs and lows in the stock market are a tempting phenomenon, which may lead to un-surmountable amount of losses. Any trading performed should be based on research and logical approach rather than an emotional flow.

By Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles of partners on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to [email protected].