In topsy-turvy markets, it is easy to lose sight of our long-term goals. Volatility can cause our actions to be driven by fear or greed if we allow ourselves to get caught up in the noise. Market dislocation often provides a chance to reallocate assets into securities that have more promising total return potential.
This is easier said than done! Why? Because investors typically demonstrate a behavior called Loss Aversion. Basically, this means that we feel the pain of loss twice as much as we derive pleasure from an equal gain. Thus, we can stubbornly refuse to sell a holding at a loss.
Philip Fisher, in his book Common Stocks and Uncommon Profits, states it this way.
There is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us. None of us likes to admit to himself that he has been wrong. If we have made a mistake in buying a stock but can sell the stock at a small profit, we have somehow lost any sense of having been foolish.
On the other hand, if we sell at a small loss we are quite unhappy about the whole matter. This reaction, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.
More money has probably been lost by investors holding a stock they really did not want until they could “at least come out even” than from any other single reason. If these actual losses are added to the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.
Focusing on long-term financial goals and steering clear of the fear and greed that surface during market turbulence can help us navigate through uncertain territory. It is imperative to stay the course, realizing the market advances the majority of the time, and this will happen in spite of the many current crises confronting global markets and economies.
No pain, no gain!
