Investors Prefer Selling Winners Over Losers, Leading to Lower Returns.
Investors tend to hold onto their losing investments for too long and sell their winning investments too soon, a behavior known as the disposition effect. A study of 10,000 accounts at a discount brokerage found that investors prefer to realize gains rather than losses, even though this strategy does not lead to better portfolio performance. This behavior is not driven by the need to rebalance portfolios or avoid trading costs. In fact, selling investments for tax reasons, especially in December, can actually result in lower after-tax returns for investors.