This plays a big role in investor behavior: Investors have a (bad) habit of selling winners and not letting losers go because of loss aversion rather than for logical financial reasons. Realizing a gain feels good: We think we did something right and were rewarded for it.
Realizing a loss can feel like we made a mistake and had to pay for it. It's easy to want to avoid taking the loss and hope that a losing stock will "come back" … if only you hold on.
But there's a big problem with selling winners: taxes. A strategy of locking in gains and keeping losers is certain to be tax-inefficient, and it can easily produce worse after-tax returns. Reducing tax liability is always important, and even more so since 2013, when rates on capital gains went up and a new tax on investment returns was imposed on some high earners.
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Another reason not to be eager to sell winners is that the trend can be your friend. Strong performers can keep rising, and it works in the other direction, too: Assets that have lost value may continue to do so.
Hanging on to winners allows gains to accumulate and defers taxes on them, while selling investments that aren't living up to expectations can prevent losses from mounting. Once they do mount, another quirk of human nature comes into play—one that Baruch alluded to: the tendency for stubbornness to give way to panic, leading investors to dump their holdings at a bottom.