How to Keep Your Cool When Markets Are Sizzling - Zweig

Buy low, sell high. Is any investing advice more universal—or more universally ignored? That market axiom was made for times like these, when stocks are hovering near all-time highs, digital currencies are heading to the moon and commodity prices are surging. Yet, when markets seem to be breaking records every day, your emotions naturally prompt you to buy high, not to sell.

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That’s largely because of the unbearable feeling of FOMO, fear of missing out. Sell a winner too soon, and you have to watch from the sidelines as it continues to soar. The most you could have lost from keeping it is 100%, but the gains you can miss out on by selling too soon are unlimited. It hurts not to buy an asset that goes on to become a huge winner. But it stings far worse to sell one. That’s an active decision, easier to imagine undoing. That focuses your attention on the mistake, making you feel you should have made a different decision and filling you with regret.

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In an article published this month in the journal Nature, behavioral scientists at the University of Virginia showed that when trying to improve a situation, people don’t even consider subtracting from it. Their default solution is to try adding something instead. Leidy Klotz, a member of the research team and author of the new book “Subtract: The Untapped Science of Less,” stumbled on this behavioral quirk while playing Legos with his 3-year-old son. “We were trying to build a bridge, and it wasn’t level,” says Prof. Klotz. “I turned around to get a block to add to the shorter column, and by the time I picked it up my son had subtracted a block from the longer column. I was amazed! It had never occurred to me to level it that way, and I’m an engineer.”

The experiments, in which more than 2,300 people participated, show that we “don’t think of subtraction as an option in the first place,” says Gabrielle Adams, an author of the study. Even when participants had to pay for additional components, they were still more likely to add than to subtract. Only when they were prompted that “removing pieces is free” did it occur to them to stabilize a Lego tower by simply taking a block away instead of paying to add several blocks.

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The question you should always ask yourself isn’t “What should I buy?” but rather, “What should I buy or sell?” Better yet, instead of asking how you can improve your portfolio, ask how you can streamline it. Yes, missing out on future gains could be painful. Missing out on future losses won’t be. In the long run, adding or keeping hot assets only because they are hot, not because you think they are undervalued, is the surest way to get burned.

https://www.wsj.com/articles/how-to-keep-your-cool-when-markets-are-sizzling-11619190301 (subscription)

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Jason Zweig is the personal finance column of the WSJ. I have often found his ideas clear and appropriate.