“Anchoring” is when you base decisions solely on the past!
In other words, your decision-making process is “anchored” to something that has happened to you.
For example, right now many investors are holding stocks simply because these stocks once traded at much higher levels than today.
In essence, investors are “anchored” to the fact that these stocks traded at triple-digit price tags and could possibly return to those levels someday. Such investors base the future on the past!
The problem with anchoring is that the past is, well, the past!
There is neither assurance nor any real reason why the future will look like the past, especially when it comes to stocks. Just because XYZ traded for 125 and now trades for 15 doesn’t make it a good stock going forward.
Unfortunately, I talk to investors all of the time who have anchored portfolio decisions to the past.
These people are concerned about selling stocks and locking up paper profits. They bought XYZ at 125 and can’t possibly sell at 15 because, well, the stock once traded for 125!
Now I’m not saying whether someone should buy or sell XYZ, but I do believe that anchoring your thinking about a stock based solely on the stock’s trading history is a huge mistake!
Look to the Future …
NOT the PAST!
You cannot drive a car looking out the rearview mirror. Similarly, you cannot manage a portfolio looking at past prices of your holdings.
It is only the future that matters …
NOT the PAST!