A look into my investor psyche

[Kalergie]

Hi guys,
I consider myself a fairly logic, rational and data driven person. Usually, before making any decision (especially re:money), I use my trusty spreadsheets and make the best decision based on the data available to me. Anyways, I recently decided to change my portfolio asset allocation. I won't go into detail about my specific investments as that's not the point. The point is that I made a conscious decision to change my AA based on changed circumstances in my life and it looks like the right decision based on my specific situation. (that's what my spreadsheet tells me anyway)

So here I am, logging into my brokerage account, getting ready to make the change. But then..... I look at my current holdings and see that the position I am adamant to sell is an overall loser. I say to myself, if I sell now, I will have lost money. So the discussion in my head begins:

Rational investor: I will sell that position because I have analysed the fund and it does not make sense to have it in my portfolio. I made the analysis, the data says I should change my AA!
Irrational dumbass investor: Maaaaaaaaan.....if you sell now, you lose like a shit load of cash. Imagine what you could buy with THAT!
Rational investor: Yes, but the data says that staying this course isn't the best way forward. The fact that the position happens to have recently lost a bit doesn't change this fact in the long-run. I have it here in my spreadsheet, look!
Irrational dumbass investor: the spreadsheet, the data..... bla bla....are you with NASA? You sell, you lose. you wanna lose money????
Rational investor: you have a point....
Irrational dumbass investor: fucking right, I have a point. You are in this to win not to lose, right?
Rational investor: so what do you suggest?
Irrational dumbass investor: easy, just wait until you are break even and THEN you can sell. I got your back man!
Rational investor: well....
Irrational dumbass investor: the time's ticking. Oh look it just lost another 0.01% while you were talking to me. Now you should REALLY not sell
Rational investor: has left the conversation
Irrational dumbass investor: Excellent!

Ever had this case of irrational taking over the rational? I just did!

[forummm]

If you bought at a higher price than you can sell for now, you've already lost the money. It's already happened, so get over it. If you do sell now, you can take a loss and reduce your taxes. A lot of people purposefully do tax loss harvesting to reduce their taxes. They just buy something else equivalentish in the market so that they are not out of the market at all. But don't buy the same thing within the wash sale period or you'll void the ability to deduct the loss.

[lostamonkey]

The money is already gone, whether you decide to realize the loss or not. It is not rational to hold a position just to avoid realizing a loss.

[innerscorecard]

You shouldn't be afraid to sell losers. One of the biggest psychological errors investors make (I do too) is wanting to waiting until you "get your money back" before you sell something. It makes no sense at all. It's pure "anchoring" bias.

[a1smith]

If you bought at a higher price than you can sell for now, you've already lost the money. It's already happened, so get over it. If you do sell now, you can take a loss and reduce your taxes. A lot of people purposefully do tax loss harvesting to reduce their taxes. They just buy something else equivalentish in the market so that they are not out of the market at all. But don't buy the same thing within the wash sale period or you'll void the ability to deduct the loss.

If you do the wash sale in an after tax account you can't declare the loss and you increase the cost basis of the new purchase by the loss amount.  So, the tax loss is not voided, just 'delayed.'

However, if you purchase the shares triggering the wash sale in a tax-advantaged account then you do lose the ability to ever take advantage of the loss.  Basically, you are adjusting the cost basis of a holding in a tax-advantaged account but the cost basis doesn't matter.

[Kalergie]

Guys, thanks for your input. I appreciate that. I guess I should give a little bit of background. I am actually an NRA investor so any tax loss harvesting wouldn't apply to me. Also, regarding my current portfolio. I currently have a three fund portfolio (World, bond, REIT). I decided to liquidate my REIT allocation in favor of World equity. Does this make any difference to your suggestions above?

[Kaspian]

The real question is: would you buy more of it?

Source: http://www.moneysense.ca/invest/train-your-investing-brain/

Framing

I recently spoke with an investor I’ll call Monique who was upset that her adviser had bought two speculative mining stocks that had since lost half their value. I asked why she didn’t just dump them, especially since she was a conservative investor who felt they were completely inappropriate. “Because I want to wait for them to get back to even before I sell,” she said. I then asked her whether she’d expect to double her money if she bought more shares. She thought I was crazy.

My chat with Monique provided a classic example of what psychologists call framing. When the same choice is presented in different ways, people often make opposite decisions. Monique framed her decision like this: “Should I sell my stocks with a huge loss or wait for them to fully recover?” When phrased like that, the decision to hold on sounds appealing. In contrast, my suggestion made me sound like a reckless gambler. But if Monique expected her stocks to get “back to even” after being cut in half, she was banking on a 100% return. The questions are the same: the only difference is how they’re framed.

[sisto]

The real question is: would you buy more of it?

Source: http://www.moneysense.ca/invest/train-your-investing-brain/

Framing

I recently spoke with an investor I’ll call Monique who was upset that her adviser had bought two speculative mining stocks that had since lost half their value. I asked why she didn’t just dump them, especially since she was a conservative investor who felt they were completely inappropriate. “Because I want to wait for them to get back to even before I sell,” she said. I then asked her whether she’d expect to double her money if she bought more shares. She thought I was crazy.

My chat with Monique provided a classic example of what psychologists call framing. When the same choice is presented in different ways, people often make opposite decisions. Monique framed her decision like this: “Should I sell my stocks with a huge loss or wait for them to fully recover?” When phrased like that, the decision to hold on sounds appealing. In contrast, my suggestion made me sound like a reckless gambler. But if Monique expected her stocks to get “back to even” after being cut in half, she was banking on a 100% return. The questions are the same: the only difference is how they’re framed.

Kaspian, I love this!!! What an excellent point.

[Kalergie]

@Kaspian: totally agree. Thinking like Monique is absolutely insane. I do consider myself quite a rational person, which is why I just did change my portfolio as per my plan. But it is funny how the mind can play tricks on you. I wonder what else people do wrong that is completely and obviously insane in the investment world.

[Kaspian]

I wonder what else people do wrong that is completely and obviously insane in the investment world.

Thinking in terms of "money silos" is something that I've struggled with.  It took a long time to get over that.  (In Dan's above article it's classified as "mental accounting".)  Thinking, "This pool of savings is for this, this investment account is this, that other one is that, grandpa gave me cash so I'd better put it here, this is play investment money, etc...," instead of thinking of it as one big pile of cash with no dollar being any more sacred than another.  Once that fully dawned on me, I was able to give my head a shake and freely move cash around into accounts to better serve tax purposes.  No particular balance/number/bill is more "special" than any other.  ...That's emotion playing.

"Recency bias/performance chasing" and "overconfidence" are something most of us struggle with.  It's hard to see something in particular to go up, up, up and not want be a part of it.  It's like a great party that you weren't invited to.  It's possibly even worse to see something sink dramatically and not bail the ship.  "Overconfidence" can be witnessed here occasionally.  People (me included) feel super-smart when our investments go up.  (As though we personally had something to do with predicting the S&P's short-term moves.)  New investors are expecting returns every year.   "Yay!  I'm up 15%!  See how smart I am?"  Portfolio drops dramatically and we feel sort of dumb--"Damn, I should have sold or rebalanced last month when it was doing OK--I'd better not tell anyone about this."

[Kalergie]

Hi Kaspian:
Great points. I totally agree and have actually copied your statement into the "Donts list"-appendix of my IPS. :)

In fact, the one point I can directly relate to is the following:

I used to have a pile of company ESPP stocks which I treated as a separate pile of assets. I never thought adding it to my networth for what ever reason. Until the ESPP stocks became quite sizable (10%+ of my overall networth). Then I realized how foolish this was. So I sold them all and rebalanced my actual portfolio with it.

[mrpercentage]

I think waiting depends on the reason. If a stock is depressed because of a sector move or a market reaction to news that disregard positive fundamentals and future prospects-- then you should stay in. They were wrong to dump the stock and it is a loaded spring waiting for the sector to return and it will return with a vengeance being a stock of actual value. However, sometimes stocks are going down because the company is beginning to fail or is in secular decline-- these are a money pit-- might as well sell it like you would a boat. Its not going up its going down some more.

A good example of a spring board and decline in action is SeaDrill. SDRL dropped to $8 a share because of the oversupply in oil. People saw this and said-- hey, thats way to low oil is just low right now lets buy some. Boom! Up to $12 a share for a couple of weeks for a 50% gain. Then they realized nope its going down (oil) and down it goes. Perhaps the last puff of a cigar butt or perhaps its still a loaded spring if oil returns. If it can survive the wait.

[FLBiker]

Boy, I should have just read this thread instead of starting my own.  I've lost ~ 65% of 10K of VGPMX (vanguard precious metals and mining) and I absolutely want to hold it until it's back even, but I wouldn't put more money in.  Thanks for "Monique's" post above!

I'm still not sure if I'll pull the trigger (even though I probably should) -- I think the fund is still decent, I just had lousy timing.  And it's my "other" portion of my AA, so I don't want to add to it.

I think I just need to psyche myself up to sell it.

[2Birds1Stone]

Boy, I should have just read this thread instead of starting my own.  I've lost ~ 65% of 10K of VGPMX (vanguard precious metals and mining) and I absolutely want to hold it until it's back even, but I wouldn't put more money in.  Thanks for "Monique's" post above!

I'm still not sure if I'll pull the trigger (even though I probably should) -- I think the fund is still decent, I just had lousy timing.  And it's my "other" portion of my AA, so I don't want to add to it.

I think I just need to psyche myself up to sell it.

Same boat here haha!! Damn you VGPMX!!!

[Kalergie]

@FLBiker: in my case, I made the decision to get out of a specific asset class regardless of its performance or timing. I was hesitant at first due to framing (as I learned here) but I did in the end follow through with it.

I am not sure, in your case, it sounds like, you want precious metal exposure in your portfolio. So you should embrace volatility as an opportunity to score those assets on sale. In your case, I'd actually stick with your Asset Allocation which you had in mind from day 1 and rebalance now accordingly. Anything else wouldn't make sense, would it? What does everyone else think?

[FLBiker]

@FLBiker: in my case, I made the decision to get out of a specific asset class regardless of its performance or timing. I was hesitant at first due to framing (as I learned here) but I did in the end follow through with it.

I am not sure, in your case, it sounds like, you want precious metal exposure in your portfolio. So you should embrace volatility as an opportunity to score those assets on sale. In your case, I'd actually stick with your Asset Allocation which you had in mind from day 1 and rebalance now accordingly. Anything else wouldn't make sense, would it? What does everyone else think?

Interesting.  I *do* want precious metal exposure (as part of my very small "other"%) but at the same time I'm wondering if this is a stupid thing to want.  I started out (moons ago) investing in individual stocks, then actively managed funds, then index.  This is the last vestige of my "actively managed" thinking.