How to Take Your Emotions Out of the Sell Decision
by Jim Norris
Facing criticism from a colleague over modifications he made in his economic analysis, the famous British economist John Maynard Keynes once said: “When the facts change, I change my mind. What do you do, sir?”
Keynes’ question is a relevant one for investors. Unless you are a buy-and-hold-forever investor, you will frequently be faced with the challenge of changing your mind. A decision to buy a stock will eventually and inevitably be followed by a decision to sell the stock.
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And when you decide to sell, you are effectively changing your mind about the prospects of the investment. Unfortunately, however, changing one’s mind is easier said than done. This is particularly true in the world of investments where uncertainty reigns and emotions run high. That combination—uncertainty and emotions—often leads to poor judgment.
In his book “Against the Gods: The Remarkable Story of Risk,” Peter L. Bernstein says that the evidence “reveals repeated patterns of irrationality, inconsistency, and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty.”
In the academic world, the disciplines of psychology, economics and finance have converged to study this issue, thus creating the field of behavioral finance. Numerous behavioral biases have been identified that inhibit human beings from making wise financial decisions.
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Discussion
Excellent article.
Don't forget though...
"Absence makes the heart grow fonder." and "Out of sight, out of mind."
posted over 2 years ago by Paul from Pennsylvania
I am just beginning with AAII and find this article to provide insights that I hope to be typical of available material.
posted 10 months ago by William from Louisiana
Very timely article. Would like the same written about when to sell a fund.
posted 10 months ago by Donald from Illinois
This is a well written article, but it doesn't resonate with me. Once a month, or whatever period is convenient, reassess each security in your portfolio with fresh eyes, as if you were considering buying it. Compare the ones with weakest prospects with the prospects of securities you like but don't own. If the latter is more favorable, sell your worst holding and buy the other.
You should never be in love with your stocks. Buy or sell decisions are always based on their future prospects (and tax considerations).
posted 10 months ago by Harold from Massachusetts
35 years of in-depth experience has proven to me that the most effective and disciplined sell strategy for all asset classes is one that is implemented at the time a security is purchased. Using a simple moving average of the securities price - i.e. 20-days (1-month) for short-term traders, 126-days (6-months) for moderate investors, and 200-days (10-months) as a fail-safe for all others, would protect the majority of investors from destructive losses.
posted 10 months ago by James from Colorado
A significenat consternation is all of my investments are in Vanguard funds. Coming out of the racession I chose to invest in bond and balanced funds. I believe this was a good plan at the time 2009+. However My portfolio is out of balance. My target is 60% bonds, 30% stocks and 10% cash. My current allocation is 75% bonds,20% stocks and 5% cash. Because of being over weighted in bonds and under weighted in stocks, I feel I need to rebalance. It is easy to do this. Sell a large % of a bond fund and buy a High yield stock fund. The bond fund is GINM that has a consistant divident. But too low to pay my bills and the fund has too little capital appreciation this year to make up for the reduced yield). The talk on the street is to decrease the bond exposier because of the sensitivity to interest rate increases and rates can't go anywhere but up. The bond fund has a duration of 4 yrs and a risk factor of 2. The risk factor of the high yield stock fund is 4. The reasonable action is to increase the risk with the stock and sell the GNMA fund. Where is he flaw in this reasoning. Intutivly I am not confortable with the plan but don't know why. I believe this is an possable example of when to sell. Will you please comment on this story.
Thanks, dickrpb@comcast.net
posted 10 months ago by Richard from Colorado
