Normally I wouldn't link to a short blog piece but I thought this was pretty good.
"Loss aversion" is one of the most common emotions that I see in my clients. No one likes to take a loss, but sometimes refusing to take a small loss may mean a missed opportunity, or an even bigger loss.
Stock prices have no memory, nor does a stock know who owns it. The most important consideration for investors should be forward-looking, yet it is always hard to avoid looking back, as the piece discusses:
You buy a stock for $50 a share, and six months later it is $30. You decide that you really shouldn’t own it anymore but you want to wait until you “get back to even” before you sell. This idea of holding on to an investment that is no longer appropriate, or may have been a mistake in the first place, until you get back to even makes no sense. The fact that you paid $50 has no bearing whatsoever on what you should do now.
In fact, I think it is fair to say that getting back to even is never a good reason to hold on to an investment. If you find yourself saying that, it’s time to re-evaluate.
Now, if only I could always remember this....
The Mental Anchor of Money Mistakes - Bucks Blog - NYTimes.com
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