Feeling nervous about your portfolio today?
Classic Wall Street advice dictates that good investors should know when to cut losses short. And certainly, some folks get lucky and manage to time trades perfectly so as to sidestep big market drops.
But most of us are bad at market timing, and the consequence of selling stocks as they start to dip tends to be locking in losses rather than avoiding them. It's hard to see a market bottom — and the best moment to get back in — until after it has already passed. In fact, the very impulse to protect yourself, called "loss aversion," may be predictive of investment errors, a new study suggests.
People who are especially emotional and loss averse are more likely to make the mistake of needlessly selling holdings and switching to cash in a down market, said University of Missouri professor Rui Yao, co-author on the paper.
"If you were laid off and don't have an emergency fund, that's one thing," she said. "But these are people who don't have immediate consumption needs and aren't harvesting losses for tax reasons. They shouldn't be moving into cash."