Many finance theorists claim that there is a common mistake that people tend to sell their assets which make profits and buy more assets which make losses, these theorists claim that people should sell their assets which makes losses because if tax efficiency. However, when considering what is the best time to sell assets, it is a tricky question. Of course, purely based on the tax efficiency concern, investors should only sell the assets which make losses; however, investors do not invest their money to show they having large numbers on their accounts, for many ordinary people, they want to make money out of their investment in order to afford better living standards.
For many ordinary people, they want to generate more cash out of their investment eventually to afford better lifestyle rather than holding more valuable assets. When individuals make their investment decisions, they are balancing the utility from immediate consumption and the discounted expected utility gained from future consumption. The future has uncertainty; therefore, given individuals are risk averse, it is only reasonable for them to make investment as long as the future expected return is significantly positive. Therefore, people sell their assets which are making profits is not a wrong decision, as when people see their investment’s current utility (value) exceeds their expected discounted future utility, they will sell their assets, and this is completely rational as well, despite it is not tax-efficient.
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