We all hate losses in investments, all of us know it and feel it. But do you know that the sadness from losses is far powerful and emotional than the happiness you get from profits 🙂 Because of this, Loss Aversion is such a powerful emotion which we humans love to avoid.
This is the reason why we will never sell loss making investments but are quick to exit and make even extremely small profits! Selling off losers is a big problem because we are realising the losses and we hate losses. Human beings regret losses we don’t want to regret this loss and we will do everything to avert this emotion – “Loss Aversion”. So what do we do?Â
We buy more such losers to “average the cost”. So we keep doing this in loop and we are spending more of our money investing in losers! As we keep doing this again and again, our Portfolio is filled with losers! This “average the cost” is never a good idea UNLESS you know for sure the investment you are buying has a strong reason to come back – think twice thrice and then buy only when its back slightly up, never when it’s falling down. The typical term in markets for this is “Never catch a falling knife”.
We should be doing exactly the opposite – Buying more of winners and reduce the losers in your portfolio! One way to get rid of this problem is to actually automate most of your investments.
