Quote:
Originally posted by MattK
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.
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I'd venture to say that it's at least partially the result of that "Buy, hold and prosper" style of thinking, that riding out slumps yield longer term gains. It's a pervasive message you'll get from any investment house, financial planner and advertising... it's true if you gauge overall market performance, but can be a bad fundimental to cling to when it blinds you from looking at individual stocks or funds.
I'd also add in a mix of people not wanting to admit to themselves that their choices might be wrong. I came across a sort of contest (I believe I read it on Motley Fool, but it was a long time ago and the memory is fuzzy) where a group of people was given (as I recall) $500,000 to invest and a year to maximize return. As it turned out, the people who invested a great deal of time researching their stocks and became convinced that the companies they invested in were the right places to put their money all ended up earning less... it turns out that by convincing themselves of how RIGHT they were by choosing the stocks they did blinded them somewhat to the reality when their choices underperformed, leading to bad returns (or losses) compared to others who had less conviction and therefore more mobility in their investment strategy.