Your Portfolio's Hidden Tax

The endowment effect silently destroys investment returns. Studies of real trading accounts show investors are roughly 1.5x more likely to sell a winner than a loser — a phenomenon called the disposition effect. You sell winners too early to lock in the pleasure of gains and cling to losers to avoid the pain of admitting defeat.

One study of 10,000 brokerage accounts found that the stocks investors sold went on to outperform the stocks they kept by an average of 3.4% over the following year. Owning a stock literally warped their judgment about its quality.