Should I Sell My Dogecoin?
The psychology of selling financial assets
I’ve heard a lot about Dogecoin in the past week or so. At first glance, it’s a cryptocurrency that literally was created as a joke and doesn’t really seem to have any particular value. So my instinct was to ignore it and let the trend die out in a couple days. However, it seems to have gotten a lot more attention. As a finance student, I follow financial markets much closer than the average person. But when I hear other people who don’t work in or study this subject on a regular basis bringing up these topics, that’s when I dig deeper.
Since Dogecoin was created, it was mostly an afterthought in the rising popularity of cryptocurrency. Dogecoin saw large price increases, but mostly following the lead of more popular coins such as Bitcoin and Ethereum. In January of 2021, Dogecoin gained some popularity from r/wallstreetbets. But since early April of 2021, $DOGE has taken on a life of its own. The meteoric rise in the price of Dogecoin has created massive (unrealized) returns for its owners. The problem is, this sudden change has brought major volatility. For those who have held Dogecoin for a month (or longer), there are huge potential profits at just the tap of the “Sell” button. Thing is, Dogecoin owners don’t want to sell too early and miss out on further gains. When is the perfect time to sell to realize these amazing returns, but not lose out on any further profits?
Short answer: there isn’t one.
Of course, there’s no perfect time to sell Dogecoin (or any financial asset). The right time to sell for the holder of any financial asset is a very personal question that’s closely tied to an individual’s psychology and risk profile.
So if you’re looking for me to tell you to sell $DOGE at anything above $0.60 or wait until it gets above $1.00, you’re out of luck. (Full disclosure, I don’t even own any Dogecoin. Sorry if the title was deceiving)
If you give someone a fish, they’ll eat for a day. If you teach them how to fish, they’ll eat for a lifetime. Instead of giving you the time you should sell, I’m going to show you how I think about selling financial assets.
I’m no psychology major, but I’ve done a lot of reading on investing and the mindset of individual investors. When it comes to selling financial assets you own, there are two key components that can affect your decision to sell: attachment and risk.
Attachment is a natural human process that occurs in our brains. We get attached to people, places, and things. Then, our brains become biased to see things in a favorable (or unfavorable) light that would not affect an objective observer. The same thing happens with investors and their assets. If I bought a stock at $10 and it went up to $20 in one week. I would likely become emotionally attached to that stock that just doubled my money. I may have a hard time selling later because of my attachment to the early returns. Someone who bought Dogecoin at $0.07 and saw it rise to $0.70 in a month may not want to sell at $0.50, even if an objective observer would sell at that point.
Emotional attachment is a natural process that is nearly impossible to prevent. So how can one address this bias and not let attachment cloud their decision to sell an investment? The biggest key is awareness. Be prepared as an investor that you will get attached to assets that perform well, and you will probably look down on assets that have underperformed. If you approach investing with this mindset, it will be much easier to recognize your own bias and make a clear decision.
One way I personally try to account for my bias is to invert the problem. A favorite quote of one of my investing heroes comes from Carl Gustav Jacob Jacobi, a 19th century mathematician. “Invert, always invert.” He believed that many difficult problems are easier to solve inversely.
I have brought this over to my personal strategy by asking myself this question: If I didn’t own this asset, would I buy it?
If the answer is yes, I would buy this asset, then I definitely don’t want to sell it. I might even want to buy more than I already own.
If the answer is no, I wouldn’t buy this asset, then the conclusion is a little bit more complex.
In a perfectly frictionless market, if the investor wouldn’t buy the asset, they should sell it. If it’s not attractive at the market price for whatever reason, the investor should sell at the market price and put the proceeds to work in other financial assets that are more attractive investments. In a world with no commission fees, it makes sense that investors shouldn’t own that asset because they can sell it and buy another asset without any explicit transaction fees. However, there are many implicit costs like research and time to input trade orders that make this strategy unfeasible.
Of course, it would be ludicrous in the real world for an individual investor to re-construct their entire portfolio on a daily basis. At the other extreme, it would also be insane to think that investors should get attached to assets they own so much that they never sell them no matter what. There must be a happy medium.
The way I approach selling is relatively simple. About once per year (usually when a company releases its annual report for stocks), I take a hard look at the securities I own and ask myself the question. If I didn’t own this, would I buy it? If the answer is yes, I hold or look to buy more. If the answer is no, I look to sell the asset and find a better place to put my money to work. I also go through this process any time there is major news that affects an asset I own.
It’s definitely not perfect, but I find this is a good way to balance my attachment to assets I own. I’m always asking myself if there is a better investment out there, but this periodic process helps me to approach the problem inversely and ultimately make a clear decision whether I should sell an asset that I own.
Risk is a super-buzz word in financial markets. You read and hear about risk all the time from market commentators and participants. There are countless kinds of risk, but here I will focus on the risks an investor takes when deciding to sell (or hold) an asset.
The basic idea is that investors want the highest returns possible. Ideally, they would sell their assets at the exact highest price point. Of course, that is never going to happen, so the decision to sell at a certain price brings risk upon the investor of missing out on greater profits if the price increases after the asset is sold. On the other hand, if an investor decides not to sell the asset, they are taking on the risk that the price will go down and they will not be able to realize all the profits they would’ve gained if they had sold at a higher price point.
Risk is another important psychological factor because investors must understand how much risk they are willing to take on in search of greater returns. Those with low risk tolerance would likely be better off selling earlier to recognize a small profit, whereas investors with high risk tolerance can stomach the potential of losing some profits in exchange for the prospect of even higher returns.
The way I have come to address and mitigate risk is to create a plan before I make an investment. Before buying a stock or other asset, I designate my goals for that investment and my exit strategy. It is especially helpful to write down this strategy. With a defined strategy written down before the investment is even made, the investor can reference that plan later when deciding to sell or hold the asset. This helps to make a clear decision by referencing the initial strategy that was formulated before the asset was purchased and any potential biases were formed.
As an example, I am investor with a high risk profile. I am happy to risk big losses in exchange for a chance at big profits. When I make decisions about my investments, I keep this in mind in order to maximize my returns while also being comfortable with the risk in my profile. I also divide my investments into two separate categories for their exit strategy. For investments that I consider short-term, I am happy to sell early to realize a small profit. For long-term investments, which make up a large majority of my portfolio, I purchase these assets with the goal of holding for many years and only selling if something goes fundamentally wrong with the investment or the price gets so high that the sales proceeds would be better put to use in another investment.
Selling an investment is a very complex decision for any investor that can be clouded by many psychological biases. But investors can make much clearer decisions if they are aware of these potential biases and employ simple strategies to mitigate the effects of bias on their decision-making.
