Memories of good investments…

Our past experiences influence our decisions and can reinforce existing market behaviour, like the momentum effect. They can also significantly influence which stocks we buy or sell to the point where having a good memory can improve your investment performance. On the other hand, there is the recency effect, where investors can recall more recent events better and more accurately than events that happened in the more distant past. This recency effect can trigger the sale of stocks from a portfolio after a day of outsized returns.

But memories are intensely personal. And while most investors experience high returns when the market has a great day, how these returns are evaluated depends very much on the context in which they are perceived by investors.

For example, if an investor has had lots of high-performing stocks in her portfolio in the past, a strong performance on day X should be less likely to trigger profit-taking than in the case of an investor with a lot of poor performers in the portfolio. On the other hand, if an investor had lots of duds in their portfolio in the past and now experiences another major loss in an existing portfolio holding, they should be more inclined to pull the trigger on a stop loss than someone who had more positive experiences in the past.

This propensity to sell stocks faster after both extremely positive and extremely negative returns for investors with a worse past performance is exactly what Julia Brettschneider and her colleagues find among US retail investors.

Propensity to sell after extreme returns depends on past individual performance

Source: Brettschneider et al. (2026)

Investors whose top three investments in the past had an average return above 50% were more likely to sell stocks that had an extreme positive return after such an event. But the probability of selling increased from 1.4% to about 1.7%, an increase in the likelihood of selling by about 20%. Investors whose top three investments had an average return below 50%, on the other hand, saw their likelihood of a sale increase from 1.6% to 2.4%, an increase by 50%.

Of course, one of the golden rules for successful long-term investors is to let the winners run. Too often, investors sell winners to lock in past returns, but let losing stocks run in the vain hope to recover these losses, which is known as the disposition effect in behavioural finance.

The lesson for professional and retail investors alike is a simple one: Always think about when you want to sell an investment, not just when you want to buy it. The moment you buy a stock or a fund, you should have a clear idea under what circumstances you would sell it. And that sales discipline needs to include scenarios for both gains and losses. When are losses big enough to warrant a stop loss? When are profits so large that the risk/return balance becomes so unfavourable that one can no longer justify owning the stock?

Professional investors are more likely to have such sales triggers in place, but you’d be surprised how rare it is even among professional investors to be able to clearly articulate for each investment when these triggers are met. And for those professional investors who cannot express these triggers clearly for each of their investments, the risk is that they reduce their performance by opening up the door to the disposition effect and other behavioural biases.