The market axiom “buy low, sell high” is “made for times like these,” writes columnist Jason Zweig in a recent Wall Street Journalarticle, adding, “yet, when markets seem to be breaking records every day, your emotions naturally prompt you to buy high, not to sell.”
Zweig points out that even the world’s greatest investors—including Peter Lynch— find selling harder than buying. “That’s largely because of the unbearable feeling of FOMO,” or fear of missing out on hefty gains, Zweig writes. He argues that while it hurts to miss out on a huge winner, “it stings far worse to sell one,” a decision that can fill investors with regret, particularly when markets are setting records and “everyone around you seems to be getting rich quick.”
The article cites new research from scientists at the University of Virginia showing how, when trying to improve a situation, people typically focus on adding rather than subtracting something from it. The study, which involved experiments (i.e., stabilizing Lego towers) with more than 2,300 participants, revealed that we “don’t think of subtraction as an option in the first place,” according to study author Gabrielle Adams. Participants were more likely to try to stabilize the Lego towers by adding rather than removing pieces.
Zweig makes the connection to investing: “The question you should always ask yourself isn’t ‘What should I buy?’ but rather, ‘What should I buy or sell?’” He adds, “Better yet, instead of asking how you can improve your portfolio, ask how you can streamline it.”
“In the long run,” Zweig concludes, “adding or keeping hot assets only because they are hot, not because you think they are undervalued, is the surest way to get burned.”