All in all, avoiding “disposition investing” is a win-win: fewer losses and fewer taxes. 1 Consequently, it is more profitable to realize our losses in the short term because it will result in a lower tax burden. Tax rates differentiate between short term gains/losses and long term gains/losses, with long term rates at about half of the short term. This is another important incentive for us to re-examine how we approach losses and gains. Taxation policies also increase the costs of the disposition effect. ![]() By succumbing to the disposition effect, we are incurring more losses and fewer gains in the long-term. A keen investor would cut their losing assets over selling assets that will likely continue “winning”. However, smart decision-making and good financial performance must be grounded in a comprehensive point of view, rather than an outlook of one-off wins and losses. So if we are given the chance between winning and losing, our response seems obvious and intuitive. At the most basic level, we can all probably agree that it feels good to win and it feels bad to lose. As much as we like to feel logical and rational, we make many decisions driven by fear, pride, and misconceptions. Investment novices and professionals alike are privy to the disposition effect. Like many individual investors, you have fallen into the enticing trap of the disposition effect: cashing in on gains before realizing your losses. However, you continue to incur losses on Company B. Also, maybe Company B will turn around in my favor in the future.I think I’ll hold onto it for a bit longer.” You decide to sell Company A, chalk it up to a win on your record, and go on your way. You think to yourself, “Well, it would be nice to go out with a win for Company A. So, which do you sell: Company A or Company B? Selling stock in either company would set you up in a solid spot financially for your travels. ![]() Their prices have both been relatively stable in the past few weeks. Company B is at a lower standing than the price you bought in at. Company A is up in value from where you purchased it. You narrow it down to selling shares of two different companies. You are looking at your investment portfolio to decide what financial moves to make, so that you can have the lavish vacation of your dreams. Imagine that you need money to finance your upcoming summer travel plans.
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