When a Giant Gain Causes Pain - MoneyBeat - WSJ

When a Giant Gain Causes Pain - MoneyBeat - WSJ:

If you have a small stake in a company, you own the stock. But if that stake suddenly grows enormous, the stock owns you. Thinking rationally about it then can become all but impossible—even if you have a doctorate in economics.



No matter how closely you analyzed a stock when you bought it, if it has since gone way up, then it is time to start analyzing yourself, says Meir Statman, a professor of behavioral finance at Santa Clara University.



“What many people are afraid of when they have a stock with a big gain,” he says, “is regret.” So you need to figure out which will bother you more: selling the stock and then watching it go up even more, or not selling and then watching it go down.



To manage both kinds of regret on a highflying stock, consider selling, say, 20% in five equal installments at regular intervals. That reduces the risk of selling too soon and of holding too long. As Terrance Odean, a behavioral-finance professor at the University of California, Berkeley, puts it: “Investors should diversify emotionally as well as financially.”



— Write to Jason Zweig at intelligentinvestor@wsj.com, and follow him on

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