Cut Your Losses and Let Your Profits Run

What is it about?

The authors analyze stock performance data from large U.S. stocks, including S&P 500 constituents and a broader CRSP sample, applying different thresholds for selling underperforming and overperforming stocks. They also investigate the strategy's performance during specific crisis periods like the 2008 financial crisis and the 2020 COVID-19 outbreak. Their findings suggest that both "cut your losses" and "let your profits run" strategies generally underperform compared to a buy-and-hold strategy. This underperformance holds across various thresholds and portfolio sizes, and it's more pronounced for the "cut your profits" strategy. They also find that the "cut your losses" strategy may have some merit during specific crisis periods, like the 2008 financial crisis, but not during the COVID-19 crisis. The article discusses the implications of these findings, suggesting that the common practice of selling losing stocks late and selling winning stocks early (the disposition effect) may not be as detrimental to investment performance as previously thought. They conclude that in markets where stocks generally rise over time, a simple buy-and-hold strategy might be more effective than trying to actively manage gains and losses.

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Photo by m. on Unsplash

Photo by m. on Unsplash