Today in the Wall Street Journal, Jason Zweig reported a quizzical study from London-based Essentia Analytics analyzing over 9,000 round-trip investments over the course of 14 years. The conclusion? Investment managers cling onto stocks longer than they should, resulting in in a loss of 0.07% performance contribution.
Zweig points out that 0.07% may seem paltry, but that it is double the yearly cost of popular ETFs like Charles Schwab and iShares.
Chris Woodcock, Essentia’s head of research, said investment managers keep stocks longer than they should because of the endowment effect. The endowment effect boils down to: I own it, so it must be worth something, I shouldn’t give it up.
So, when it comes to knowing when to sell, it seems the professionals may be as flummoxed as the average investor. Woodcock also told WSJ that portfolio managers tend to keep “bad news” out of sight out of mind and focus on the positive of the stocks they own.
How about you? Do you time the market, or tend to invest passively for your clients? Have you ever been guilty of the endowment effect?
