Tid til söndags reflektion.... Ja vi ved det jo godt alle samme. Men det er bare saa vanskeligt med portfoelje styring og stop loss. Synes denne artikel fra UBS saetter det godt i perspective og giver et par gode raad.
Selv om de sidste 6 mdr. har vaeret fantastisk, saa har jeg da stadig et par skeletons i min portefoelje. Mon jeg er den eneste?
God soendag.
/Saadan
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Skeleton in your portfolio
Rather than take a loss, many investors will continue to hold losing investments, sometimes for years and even when there is little hope of recouping losses.
Professional investors, in contrast, often switch out of losing positions rapidly, choosing to cut losses and reallocate remaining capital to investments with better prospects. What causes the inability to sell in the former case, and how have more experienced investors managed to create selling disciplines?
Behavioral finance research has demonstrated that we share mental processes, or biases, that help us deal with complex information and make quick decisions. As helpful as they likely were over the course of human development, in today?s context they can wreak financial havoc. Investment decisions are especially difficult because they involve risky choice, where we must make decisions under conditions of often considerable uncertainty. Uncertainty itself can keep us in a losing position for far longer than any rational analysis would suggest is prudent; we hang our expectations on even the slightest possibility of eking out a gain or at least breaking even. The difficulty of selling losing investments can be explained by three major behavioral biases:
Endowment effect
Investors undergo significant changes in their decision framework once they own an asset. The ?endowment? effect causes us to demand higher values for assets based on ownership alone. This makes sense from an evolutionary perspective; keeping and defending game one has caught is far more certain than chasing new, mobile quarry, even if it is potentially twice as tasty. The US housing market, where home prices declined since 2006 while inventory built up, is the best current evidence for
the endowment bias. Owners refuse to accept the prices offered by buyers, and therefore housing markets do not clear and only adjust with a lag.
Status quo bias
Biases are not polite enough to work alone, but often come in groups. Status quo bias
refers to investors? ?strong tendency to remain at the status quo, because the disadvantages of leaving it loom larger than advantages.?1 Essentially, no matter how objectively poor our financial situation is, we are mentally wired to maintain it, a variation of the ?devil you know is better than the devil you don?t? proverb. In a field experiment, electricity consumers with good service were compared with consumers with unreliable electricity service. Each group was asked about their preferences for service quality and rates. When asked to rate a selection of service choices, each group strongly preferred their existing condition ? their status
quo ? to any other. Of the group with good service, 60% wanted their status quo, while
only 6% preferred the option of poor service with a 30% cut in rates. The poor service
group also liked their poor service the best (58%), with only 6% wishing to switch to
the good service option at a 30% increase in cost!
Loss aversion
At the core of behavioral finance is loss aversion. Simply put, we react differently to financial losses than we do to gains of similar magnitude. Researchers have found differences down to the physiological level, with different brain areas activated by different return or loss states, and differing levels of stress hormone activity. As they put it, we have ?asymmetric? reactions to losses versus gains, and often take
more risk to avoid losses than we would to pursue profits.
In combination, these biases provide a true basis for understanding why investors frequently keep losing investments. Selling forces us to realize losses; a subtle distinction, but one with clear emotional differences. On top of this, we seem wired to prefer the situation we find ourselves in, no matter how good or how bad. Lastly, ownership is emotional, no more so than in the case of a personal residence,
assets one has inherited, or stock in a company for which one works. These personal attachments compound the endowment effect and lead not only to the inability to sell when faced with losses but also to the inability to diversify out of an overly concentrated investment, especially one that has been good to us.
Tips to mitigate these effects
Buying an investment is a serious decision and gets the attention it deserves. Selling
the same investment should get the same consideration, even before the purchase is made, in order to carefully account for the biases described above before they manifest themselves. Consider the following questions for each investment:
1. What is the specific intent of, and timeframe for, the investment? If you intend to hold an investment for income and for a long period, then short-term fluctuations in value should not be as important as they would be were the investment intended for capital growth over a short time frame.
2. What share of your assets does the investment represent? A 10% loss in an investment that is only 10% of your total assets is perhaps more bearable than 10% losses on an investment that comprises 90% of your wealth.
3. How will you feel and react to losses and what is your loss limit? Visualize a negative outcome for the investment and imagine how you would feel emotionally at different levels of losses. Put a stop-loss in place at the outset of your investment at the level where you would not be able to tolerate further downside, and raise it if the investment gains in value.
4. Set up a consistent loss policy. Many professional investors use loss rules to mechanistically counter-act the tendency to ?let losses run? when markets turn against them. They simply monitor their trades and sell any position that moves more than, say, 20% down, no matter how they feel about the position or no matter how firmly they may still believe in the fundamental case that underpinned the
original purchase.
Selv om de sidste 6 mdr. har vaeret fantastisk, saa har jeg da stadig et par skeletons i min portefoelje. Mon jeg er den eneste?
God soendag.
/Saadan
-----------
Skeleton in your portfolio
Rather than take a loss, many investors will continue to hold losing investments, sometimes for years and even when there is little hope of recouping losses.
Professional investors, in contrast, often switch out of losing positions rapidly, choosing to cut losses and reallocate remaining capital to investments with better prospects. What causes the inability to sell in the former case, and how have more experienced investors managed to create selling disciplines?
Behavioral finance research has demonstrated that we share mental processes, or biases, that help us deal with complex information and make quick decisions. As helpful as they likely were over the course of human development, in today?s context they can wreak financial havoc. Investment decisions are especially difficult because they involve risky choice, where we must make decisions under conditions of often considerable uncertainty. Uncertainty itself can keep us in a losing position for far longer than any rational analysis would suggest is prudent; we hang our expectations on even the slightest possibility of eking out a gain or at least breaking even. The difficulty of selling losing investments can be explained by three major behavioral biases:
Endowment effect
Investors undergo significant changes in their decision framework once they own an asset. The ?endowment? effect causes us to demand higher values for assets based on ownership alone. This makes sense from an evolutionary perspective; keeping and defending game one has caught is far more certain than chasing new, mobile quarry, even if it is potentially twice as tasty. The US housing market, where home prices declined since 2006 while inventory built up, is the best current evidence for
the endowment bias. Owners refuse to accept the prices offered by buyers, and therefore housing markets do not clear and only adjust with a lag.
Status quo bias
Biases are not polite enough to work alone, but often come in groups. Status quo bias
refers to investors? ?strong tendency to remain at the status quo, because the disadvantages of leaving it loom larger than advantages.?1 Essentially, no matter how objectively poor our financial situation is, we are mentally wired to maintain it, a variation of the ?devil you know is better than the devil you don?t? proverb. In a field experiment, electricity consumers with good service were compared with consumers with unreliable electricity service. Each group was asked about their preferences for service quality and rates. When asked to rate a selection of service choices, each group strongly preferred their existing condition ? their status
quo ? to any other. Of the group with good service, 60% wanted their status quo, while
only 6% preferred the option of poor service with a 30% cut in rates. The poor service
group also liked their poor service the best (58%), with only 6% wishing to switch to
the good service option at a 30% increase in cost!
Loss aversion
At the core of behavioral finance is loss aversion. Simply put, we react differently to financial losses than we do to gains of similar magnitude. Researchers have found differences down to the physiological level, with different brain areas activated by different return or loss states, and differing levels of stress hormone activity. As they put it, we have ?asymmetric? reactions to losses versus gains, and often take
more risk to avoid losses than we would to pursue profits.
In combination, these biases provide a true basis for understanding why investors frequently keep losing investments. Selling forces us to realize losses; a subtle distinction, but one with clear emotional differences. On top of this, we seem wired to prefer the situation we find ourselves in, no matter how good or how bad. Lastly, ownership is emotional, no more so than in the case of a personal residence,
assets one has inherited, or stock in a company for which one works. These personal attachments compound the endowment effect and lead not only to the inability to sell when faced with losses but also to the inability to diversify out of an overly concentrated investment, especially one that has been good to us.
Tips to mitigate these effects
Buying an investment is a serious decision and gets the attention it deserves. Selling
the same investment should get the same consideration, even before the purchase is made, in order to carefully account for the biases described above before they manifest themselves. Consider the following questions for each investment:
1. What is the specific intent of, and timeframe for, the investment? If you intend to hold an investment for income and for a long period, then short-term fluctuations in value should not be as important as they would be were the investment intended for capital growth over a short time frame.
2. What share of your assets does the investment represent? A 10% loss in an investment that is only 10% of your total assets is perhaps more bearable than 10% losses on an investment that comprises 90% of your wealth.
3. How will you feel and react to losses and what is your loss limit? Visualize a negative outcome for the investment and imagine how you would feel emotionally at different levels of losses. Put a stop-loss in place at the outset of your investment at the level where you would not be able to tolerate further downside, and raise it if the investment gains in value.
4. Set up a consistent loss policy. Many professional investors use loss rules to mechanistically counter-act the tendency to ?let losses run? when markets turn against them. They simply monitor their trades and sell any position that moves more than, say, 20% down, no matter how they feel about the position or no matter how firmly they may still believe in the fundamental case that underpinned the
original purchase.
20/9 2009 15:51 renek 0
19874 Loss aversion er helt klart det mest indflydelsesrige bias på aktiemarkedet. Vi bruger en ufattelig masse tid og kræfter på at flytte penge rundt i forskellige mentale "konti"...men et tab er et tab. At flytte kr. 100 fra én lomme til den anden ændrer ikke dens værdi
