Locking in 5-10%: a common habit of retail investors
There's a common investment habit among retail investors: locking in profits when returns reach 5-10%. It's an instinctive reaction to avoid further risk and play it safe when you're guaranteed a return above the bank rate.
However, this behavior is not always correct, as it violates the principle of "going long on profits and short on losses." This habit can lead to small profits and large losses.
Regret after you've locked in your profits
If you decide to sell when you reach 5-10% profit, and the stock price rises further afterward, you'll be left with a lot of regret and remorse. Especially if the stock price continues to rise after you've locked in your profits, reaching over 100% above the price you sold at, you'll be shocked.
In this situation, investors often end up buying back at the peak, and end up losing a lot of money. To avoid this pattern, you need to understand the concept of the "Fat Tail".
Understanding the Fat Tail Effect
The "fat tail" refers to the phenomenon of extraordinary returns beyond normally distributed probabilities. When this effect is understood and utilized, the large returns of individual stocks can significantly boost the overall return.
This is why it's important for investors to stay consistent with their investment strategy and not cut their losses when they start to make gains. Especially in a bull market, cutting your gains can lead to big losses, so you should look for long-term gains rather than chasing a locked-in profit.
Conclusion: Stick to your principles
When it comes to investing, the most important thing is to stick to your own rules and principles. Don't cut off a winning trade midway through, and let it run free. This way, you can take full advantage of the "fat tail" effect, which can significantly boost your overall returns.
In other words, when it comes to investing, it's important to look for long-term gains rather than chasing a locked-in profit. It's important to stick to your guns when it comes to investing, as this can be the equivalent of gouging the goose that lays the golden egg. Therefore, it's important to stick to the principles of investing.
