Overconfident investors underdiversify. In a typical month, the median investor in our sample held three common stocks. Of course, some achieved diversification by also owning mutual funds, and others may have owned stocks at other brokerages. Eight stocks accounted for half of that gain. Thus, in the midst of a bull market, an undiversified investor was more than twice as likely to be left at the starting gate as to win the sweepstakes.
People hate to sell for a loss.
If you sell for a loss, you will always regret the purchase. Furthermore, if your stock later bounces back, you will regret the sale. This is an ill-considered policy from a tax point of view. Worse yet, most losers don t bounce back. One year after the sale, the losers investors clung to had underperformed the winners they sold by an average of 3.5 percent.