A small segment broadcasted on the ABC's Midday Report, Thursday 1st March, gave an interesting insight into the psychology of investors. The report focussed on a recent US study which found that investors tend to sell better performing assets to meet cash flow needs and hold on to poorer performing assets. The theory goes that investors do not like admitting failure and hold on to poor / negative performing assets in the hope that the results of these assets will turn around in the future and at least beat the price that they were bought for. Sound Familiar!!!
Actually, the investor would be better off holding strong performing assets and cutting their losses and running from poor performers. This is not only on the basis of future performance but also on the basis of tax. Selling poorer performing assets will have a smaller or even negative capital gains implication for the current year Sounds easy in hindsight but who can be sure whether poor performers today will be outperformers next year?
What do we say at A Clear Direction?
If there is a need to get extra cash flow then hopefully an amount of cash has been left aside to cover this scenario. If not, then we are not in the business of picking asset winners and losers, rather selling down across a client's portfolio to maintain what we together have decided as the right mix of assets.
