The Mind Game That Investors Can't Stop Playing — WSJ

By Jason ZweigInvestors keep chasing performance, but they never seem to catch it.The latest evidence comes from exchange-traded funds that invest in bitcoin. Investors piled into these ETFs when a batch of them launched in January 2024, but the funds have earned much higher returns than their investors.That's because so many buyers of these funds bought high and sold low — a recurring pattern that says much more about human nature than about cryptocurrency.We all know the whole point of investing is to buy low and sell high, yet we often do the opposite. Collectively, this self-defeating behavior costs investors billions of dollars. You can conquer it, but only with an honest look in the mirror and a commitment to change.How can investors underperform their own funds? The reported returns on an investment assume you bought at the beginning of the measurement period, held until the end, and never added or withdrew any money.That tells you how the investment behaved. It doesn't tell you how its investors behaved. Because they are human beings, they pursue pleasure and flee pain.Look at the bitcoin ETFs, typical of the trendy funds that have proliferated in recent years. Bitcoin was trading at about $46,000 when almost a dozen funds launched on Jan. 11, 2024. By June 30 of this year, it was worth about $58,700.So investors in these funds did well, right?Wrong.Some people surely did earn big gains in any of these funds, if they timed their trades just right. But, as a group, the investors in these funds added more money after periods of hot performance and yanked money out after returns were poor — missing out on much of the run-up but locking in losses on the way down.In the aggregate, the investors in this original cohort of bitcoin funds lost an average of 5.8% annually, estimates Jeffrey Ptak, an analyst at Morningstar who has written extensively about this problem.From October 2024 through January 2025, as bitcoin lofted past $100,000, investors poured an astounding $20.7 billion into this group of ETFs. When bitcoin sank in February and March 2025, they pulled out more than $3.6 billion. Then, from May through July 2025, as bitcoin's price sailed past $100,000 again, investors showered another $15.7 billion on these funds.From November 2025 through this May, as bitcoin's price collapsed more than 30%, people yanked $6 billion out of these ETFs, locking in losses.In the second quarter of 2026, "there was aggressive selling even as the market pulled back substantially," says Matt Hougan, chief investment officer at Bitwise Asset Management. The firm runs several cryptocurrency funds, including the $2.5 billion Bitwise Bitcoin ETF, which launched in January 2024.The recent rash of selling "felt a little bit like investors giving up at the bottom," he says, whereas "the ideal response for long-term investors [who believe in bitcoin] would be to rebalance and average up their position."I've been writing about this behavior gap since long before bitcoin existed. It isn't just individual investors who underperform their own investments. Financial advisers and big institutions do, too.Why can't they seem to stop? Buying a fund after it goes up is the natural thing to do; it feels good, because the rising price feels like validation. Selling after it goes down (or declining to buy more) also feels natural; losing more money is a scary prospect.It was obvious in January 2024 that the bitcoin ETFs would create huge demand that would make the price go up. "That resonated with investors' intuitions," says Ptak. What wasn't obvious, though, is that the price might already have risen in anticipation of that additional demand."These narratives form, and people can't resist them, and that bedevils people time and time again," says Ptak.It's hard for investors to learn from their mistakes because they tend to underweight the importance of luck, overestimate the role of skill and "overinterpret what may be chance events," says Alex Edmans. A finance professor at London Business School, he is the author of the forthcoming book, "The Madness of Markets: Why Smart Investors Make Crazy Decisions and How to Exploit Them."Plus, Edmans says, we "curate" the feedback we get on our decisions.You might focus on the profit you made on that trade, without checking how much more you could have earned by holding an index fund. Even if you ended up selling at a loss, you might tell yourself you got talked into selling too soon or too late, and you won't make that mistake again."Investors credit skill for their gains, but blame their losses on bad luck," says Edmans.How can you narrow the gap between what your investments earn and what you earn? First, count all your trades, not just the winners, and compare how you did against a broad market benchmark. Whenever the urge to gamble strikes, use a "mad money" account segregated from the rest of your portfolio.But it's much better to allocate than speculate. If you bet money on whims and hunches, you'll pull it right back out based on gut feelings, too. Instead, pick a percentage and stick to it.You think low-volatility stocks are an underappreciated hedge against overvalued technology shares? Put, say, 5% of your money in a low-volatility ETF. You really think bitcoin will transform finance? Put 1% in it.When your bet goes cold and shrinks below your target percentage, buy enough to get back to your allocation. When it gets hot, sell enough to get it down to your target. Use your retirement account, where the trades won't trigger tax bills.Above all, remember: When you chase hot performance, the one thing you're almost sure to get is burned.Write to Jason Zweig at [email protected]