“Stop the Bleeding?”

Feb 2016 //
Behavioral Finance

While long-term stock price movements are reasonably knowable and understandable (prices rise to reflect advances in science, medicine, productivity and inflation), future short-term stock price movements are always unknowable.  Always.  This economic reality can prove difficult to accept for some investors who are schooled in the sciences.  For example, health care workers are trained to treat a bleeding patient by working to stop the bleeding.  Since bleeding doesn’t typically stop spontaneously, it makes sense to practice and preach, “Stop the bleeding.”  However, financial markets don’t bleed, much as it may feel that way at times.  Over the short term, selling a diversified portfolio of investments to stop it from “bleeding” is at least as likely to stop future gains as future losses.  Over the long term, selling will do just one thing:  It will stop gains.