Cut your losers and let your winners run is an old investing adage. It’s also rarely followed by investors.
Instead, investors have an affinity for selling winners. It feels good. It builds our confidence and gives us something to brag about for years.
In fact, we’d rather sell an investment that’s made money — likely continues to make money — than suffer the pain of selling a loser. So we hold onto the loser with the hopes that it breaks even.
The blunder of selling winners too soon and holding losers too long is known as the disposition effect. It’s one of the biggest mistakes investors make.
Daniel Kahneman once said that it originates with our inability to view our portfolio in its entirety. Every good portfolio is designed to meet some objectives. It lays out exactly what should go in it and why.
Of course, every portfolio is bound to have winners and losers. Nobody bats 1,000, after all. Losing is part of the game. But collectively, those winners and losers still produce a long-term return. Continue Reading…