“Buy low, sell high” – the adage makes investing sound simple. But investors, particularly retail investors, commonly do just the opposite. Why do investors often sell assets when they’re cheap and buy them when they’re expensive? According to Jason Hsu, Chief Investment Officer for Research Affiliates, it’s because investors’ appetite for risk changes over time.
This is contrary to conventional finance theory, as Dr. Hsu explains in this video. But new “empirical and theoretical findings” contradict convention. “After investors have sustained fairly significant losses in their portfolio, they’re likely to become much more risk-adverse, and therefore, they’re unlikely to be willing to rebalance into additional risky assets in their portfolio, even if prices have become cheaper and returns have become attractive.”