Investing in Mind Reading 5 Don t pull out flowers too soon because of the disposal effect .

Mondo Psychological Updated on 2024-01-31

Welcome to the "Investing Mind Reading" series of investment education articles, let's walk into the interesting world of investment psychology together.

Some investors are always accustomed to selling the stock price, but clinging to the stock price, just like "pulling out flowers and watering weeds".

Peter Lynch.

Xiao Li recently wants to use money, need to redeem some **, at present he has two ** in his hand, both of which were bought at the time of the first launch, a** has been going well, the net value has risen to 1 yuan 3, b** performance has not been good for a long time, and the net value is about to fall to 8 cents 5. Which one should be redeemed?

* In the investment journey, we are like Xiao Li, we often have to do such multiple-choice questions, and many people may give priority to redeeming A** with good performance, and the reason is very simple and straightforward: "Because A** makes money!".”。

However, when you do this multiple-choice question a few more times, you will find that the "money-making" ** in the account is basically gone, and most of the ones left are still floating losses**.

This so-called "profit and loss", that is, the redemption of floating assets and the investment phenomenon of holding floating loss assets, is the common "disposal effect" in investment.

Unwise "disposition effect".

Research has proven that "profit and loss" is not a wise investment decision, but a typical cognitive and behavioral bias.

The disposal effect will lead investors to regret the long-term floating losses and poor performance, and then ignore them and put them on the shelf, passively forming "long-term investment" and "long-term holding".On the other hand, those who have performed well for a long time and made money for themselves are always remembered to redeem early, and the holding time is not long.

This practice can easily lead to a number of underperformers** remaining in the account, which can deviate from the established investment plan and goals, and lose potential returns.

Causes of the disposition effect

In the communication with investors, we can find that there are two main sources of psychological misunderstandings about "profit and loss".

The first is the emotional sense of achievement, satisfaction and security when cashing in on profits. Cashing in profits will make people proud and happy, especially when there are a lot of floating profits and the market is in turmoil, in order to keep the "fruits of victory" and avoid regret due to "roller coaster", investors often prefer to make profits "in the pocket".

The second is the erroneous belief that "if it falls too much, it will definitely fall" Some investors believe that the net value of ** is like a spring, and if it falls too much and "tightens", it will naturally "bounce" back, so the floating loss will be pressed at the "bottom of the box", and it will not be redeemed if it is not profitable.

Avoid plucking flowers too early

The disposition effect "will tie the hands and feet of ** investment, reduce the quality of the portfolio, and affect the long-term investment returns." In order to overcome the "disposition effect", the following points need to be clarified:

First, the passive formation of "long-term holding" due to poor long-term performance and floating net value is not a benign and effective "long-term holding". Advocate long-term holding, is a long-term performance of the good, investors only because of floating losses and long-term poor performance, in the end may not make money for a long time or need to stay up for a long time to "surface", not only the time cost of the capital, but also may miss other better investment targets and investment opportunities.

Second, the so-called "falling for a long time will rise" is a wrong perception, and it should not simply be based on profit or loss as the only criterion for staying. In the ** market, if the stock price falls a lot, and the fundamentals of the listed company have indeed not changed, waiting for the market sentiment to stabilize, the stock price will often gradually repair and return, and get closer to the intrinsic value of **. However, the net value cannot be simply compared with it, and there is no such thing as "over-falling repair".

Taking active ** as an example, if the comprehensive ability of ** manager is not good, the performance may fall into a long-term downturn, and the net value will not necessarily be able to "bounce" back in the future. For those who are in a state of floating loss, in addition to the fact that the time point may be high, it is also necessary to objectively do a detailed attribution analysis: some ** only go down with the general trend of the market, but the fundamentals are no problem, and they can obtain excess returns stably, so they can consider holding and waiting patiently for the market to warm upAnd some ** not only with the general trend down, but also long-term performance benchmarks, similar performance rankings have also been behind for a long time, if this happens, it is not appropriate to expect too much performance will appear so-called "**."

In addition, when considering the current profit and loss, the current profit and loss should not be taken as the only criterion, and the long-term performance, whether the investment logic of the original investment has changed, and whether it matches your current risk tolerance.

Third, control your emotions, focus on your long-term goals, and not be bound by the "disposition effect". The "disposition effect" can play a role, and it is also directly related to short-term emotional fluctuations of investors' pride, excitement, remorse, and desire to win and fear of losing. From a practical experience, if we focus more on long-term investment goals, rather than hovering over short-term gains and losses, it will help investors to calm their emotions, examine their positions more objectively, and make more rational investment decisions.

All in all, to avoid "pulling out flowers" too quickly, cashing in on earnings, avoiding holding poor performance for too long, and breaking free from the psychological shackles of the "disposal effect", investors can:

Control emotions, focus on the long term, objective and rational, for high-quality products suitable for long-term investment, if there is a floating profit, it should be added to the confidence and perseverance of insisting on holding, rather than giving priority to redemption and exit.

If it is found that there has been a problem with long-term performance and the investment logic has changed, etc., and it needs to be adjusted after comprehensive consideration, even if it is still a floating loss, it can also be considered to revise the portfolio allocation plan.

This can reduce the long-term negative impact on investment income due to premature profit-taking due to high-quality**, and the failure to reasonably optimize and reduce the quality of the retained portfolio. (In addition to the annotations, data and charts**: E Fund Investor Education Base).

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