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quote from a recent article about trend-following:
"Fear is stronger than greed, which is why financial markets fall more rapidly than they climb.
Most investors will say the sentence above is common knowledge. But if so, why then do most investors fail to act on what they know?
The failure I have in mind is the behavior toward risk, namely: The average investor is risk averse toward a known gain, but is risk seeking toward a certain loss.
When a stock goes up in price, individuals will sell too soon, especially when that stock has outperformed the broader market. They avoid risk by locking in the gain. When a stock goes down, individuals won't sell soon enough, especially when that loser has underperformed the market. They are willing to risk even deeper declines, rather than to cut their certain losses.
Study after study bears out this truth, both in controlled experiments and in the data reflecting the gains & losses of actual investors. Published results from firms like Dalbar Financial and Vanguard consistently show that over the past 20 years, individual investors and mutual fund shareholders have had average returns that are half (at best) of the annual returns of the broader stock market.
What's more, these same studies and surveys also show that most investors are overconfident in the decisions they make. Put another way, they don't even know that they are their own worst enemy."
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