Why Investors Sell Winners Too Soon and Hold Losers Too Long
Why do we tend to hold on to losing investments?
Imagine you own two stocks.
One is up 25%.
The other is down 30%.
Which one are you more tempted to sell?
Surprisingly, many investors sell the winner—and keep holding the loser.
This tendency is called the disposition effect.
Why does it happen?
Selling the winning stock feels good because it lets us lock in a success.
But selling the losing stock forces us to admit:
“I was wrong.”
So instead, we tell ourselves:
“I’ll just wait until it comes back.”
The problem is that the market doesn’t care about our purchase price.
A stock that fell from $100 to $70 is not automatically a bargain just because we paid $100 for it.
And a stock that rose from $100 to $125 is not automatically overpriced just because we have a profit.
What matters is the company’s future prospects from today onward.
The disposition effect can therefore produce a strange result:
We cut our best-performing investments short while giving our worst decisions more time.
The lesson
When deciding whether to sell, forget what you originally paid for a moment and ask:
“If I had cash today, would I buy this investment at its current price?”
If the answer is no, holding it simply to avoid realizing a loss may be emotion—not strategy.
