What Professor Odean Found Will Shock You

Keith Fitz-Gerald
Total Wealth

The markets have been flirting with all-time highs a lot lately and many investors are thinking about selling.  I wouldn't ... at least not arbitrarily anyway.

If you need the money, or you're selling as part of a disciplined investment process using something like the trailing stops we talk about all the time - fine.  But selling because you're scared or just because you feel like it is a bad idea because it means you're giving in to your emotions, and that never ends well.

I say that because I've never forgotten about a study from a Berkeley Finance Professor named Terrance Odean back in 2000 who analyzed more than 66,465 households and 10,000 brokerage accounts only to find that stocks investors sell tend to outperform the ones they buy.

In fact, Odean found that winning stocks went on to gain an average of 3.4 percentage points more in the year after they were sold than the losers to which they clung.

I can't imagine that's changed very much today.

In fact, I know it hasn't given the latest DALBAR data shows investors who try to time the markets consistently lagged the S&P 500 benchmark by nearly 5% each year.

Which is why I will never hesitate to recommend putting more capital to work in the right companies even now.

And you shouldn't either.