This chart is amazing. It shows the rise and fall of various bubbles in our history. As of today, Bitcoin is the worst. There is a lot of money you can make if you get in AND then out of a bubbling asset class before the pop. Unfortunately, there is a lot of money you can lose too.
As things begin to turn south why do people hold or hodl? Why don’t they just sell and lock in gains or protect against more losses? On paper it seems like a very simple idea.
But in reality it’s actually very hard because of something called “Anchoring.”
Anchoring is the cognitive bias that describes the human tendency to rely too heavily on the first piece of information offered when making decisions.
In finance that is usually the purchase price of the investment or its’ highest value
As volatility picks up, like we are seeing in CRYPTOCURRENCY, people will lock in on either of those numbers.
“I will sell when it gets back to my purchase price so I don’t lose money.”
“If it reached 20,000 once it can do it again!”
These are completely irrational thoughts. The current price of any asset is not connected to any previous price. The asset will move on its own. It could go to zero (yes zero) just as easily as it can run up again. But because you have “anchored” yourself to some past number you can not think clearly about what the best thing to do today.
The situation can change on a dime and you must change your investment thinking with it.
To prevent yourself from Anchoring, you must have an investment plan before pulling the trigger! It’s ok to buy into a bubbling asset as long as you have rules in place telling you when to get out.
I understand that when things are going up you don’t have to do much thinking. “Let it ride!” But you need to have a plan when there is a pull back. You can ratchet up your sell price but you must have a plan.
The last piece of advice is, after you write down your plan and if you have to execute it (there is a pull back) walk away from that specific investment. You will beat yourself up if it rallies and you sold out.
You must believe that every situation is unique and you acted in the best way with the information you had at the time.