Our irrational fear of losing money leads us to lose it.
It is as well.
And what is the myopia that we have investors as to the aversion to loss and is one of the irrationalities in which we fall when we invest. Those irrationalities cause us to be inefficient in the management and accumulation of payoffs in our portfolio.
We tend to have a inordinate fear of with the possibility of losses in the short termbut, at the same time, we forget the cost of leave go to the retained earnings.
If what says the theory is that it cuts the earlier losses and that you stay in the portfolio and those positions in which you have profits, we tend to do the opposite.
Why? Because emotionally realize profits gives us a chute important of trust and optimism in our capacity to manage investments (in addition to a great topic of conversation to get chest at a dinner with friends or, better still, family members of second-or third-degree).
Meanwhile, our risk aversion leads us to avoid at all costs are realized losses although the assets in which we are losing money do not have many chances actual and reasonable to recover.
This should lead us to two conclusions:
1.- If you have in your portfolio positions with profit… let’s keep them! If you sell them, the next asset you purchase will often have a worse chance of giving you a positive return.
2.- If you have in your portfolio positions with losses… it véndelas! And uses that money to find another asset. If the latter proves to have a positive behavior, will return to the first conclusion.
A different way to combat this myopia that we suffer is look at the long-term and realize that the probability of loss is reduced very significantly.
Even beginning to invest at a bad time, the long-term “fixes” thanks to such spectacular effect that it has on the probability of losses.
Let’s look at an example very visible and that is surely still in the head of many investors: the global financial crisis of 2008. Crisis where the index more representative of the global financial markets, the S&P 500, came to fall more than 55%.
Let’s imagine that we had invested prior to those falls so extraordinary. Today, (30 September 2020) we would have accumulated a return of 180% or 8,27% per annum in the S&P500 index.
This spectacular effect of the long-term on the probability of losses becomes even to the abyss prior to the great global financial crisis in a spectacular time to invest.
How can we ensure the same thing about the fact of having invested before February 19 of this year? I am personally convinced that yes.
Obviously, both sell what we are losing as be as disciplined as we can with the time horizon is complicated. But, if we do so, we would make that our investments would be more intelligent.
***Gonzalo Pradas is a director of open bank Wealth