Saturday, 13 July 2013

"I finally had a profit, so I sold that investment."

There is nothing wrong with taking profits, but keep in mind that investors are constantly fearing regret and seeking pride. This is what is called the "disposition effect."

It is a result of the pain of an investment loss hurting much worse than the pleasure of a gain. Academic research has shown that investment losses hurt about two and a half times more than the positive feeling you get from an equivalent investment gain.

Net of taxes, whether you have a gain or a loss in an investment says absolutely nothing about its future prospects.

In a new bull market this bias causes investors to sell winners too early (seeking pride). Also, the painful regret associated with taking losses can keep investors from selling past bear market losers to buy new bull market leaders.

To help yourself avoid this bias, make sure that you have a process for buying and selling investments that is disciplined, fundamentally sound and repeatable. The bragging rights associated with quick gains are great, but the future profits you may miss could have been even better.

1 comment:

Money Honey said...

Every investments divested at a profit however small is opening up a new round of investment opportunity.