The so-called “disposition effect,” or tendency for investors to sell their winning stocks and hang on to losers, can also prove harmful in a bull market. Even though this bull, now the longest in history, seems to have entered its later innings, the economy is still growing at its best pace in four years, and the consumer is in good shape due to low unemployment and rising wages.
“Some investors are selling their stocks because they fear a pending bear market,” Pompian says. “The flaw in this thinking is that the economy is strong and there are few signs that a recession is imminent.”
There’s always some opportunity for investors to do harm to themselves, Odean says. That’s why he says investors should avoid trying to time the market. A better strategy, he says, is to make financial decisions in “times of calm reflection.”
“When the market does get really wild, that’s not the time to be making investment decisions,” Odean says. “Once a year, you’re better off asking, ‘Do I have the asset allocation I want?’ rather than trying to predict where the market is going or what the next hot stock will be.”
Tip: If you own a top-performing stock, keep a close check on its business health, and if earnings, sales and market share remain strong, there may be a good case to keep it.