Before I learned about the low-cost index funds that have become my primary investment strategy, I worked with a financial advisor who steered me in a different direction. I rolled a 401k into an IRA invested in six different stocks and exchange-traded funds (ETFs) he suggested. But, as my knowledge about investing, my risk tolerance and my preferred approach grew, I started to re-evaluate the funds he recommended.
I knew my money was in the wrong investments. I knew I needed to get $7,500 out of two funds that were underperforming the market and were not part of my long-term allocation strategy. I even knew the psychological traps behind why I couldn’t seem to just pull out my money and put it where I wanted it to go. And yet, I ignored all of that for one reason: I would lose $2,000, and I hated the idea.
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Caution: Psychology at Play
I was succumbing to loss aversion — the idea that losing something you already have is less preferable than gaining something of equal or even greater value. I suffered from sunk cost bias, too. I had invested almost $9,500, and until I sold those shares, the $2,000 loss was just a paper value. Selling the investment would lock in the loss. Oh, and I was also trying to rationalize market timing — yet another investment trap I knew better than to fall into. I bought the shares at what would turn out to be close to the high-water mark for the next three years. My internal conversation went like this: “These ETFs are in energy and pharmaceuticals, which have to rebound at some point. I can just hang on until they do and cash out at close to what I paid for them.”
I couldn’t simply take the loss and use it to offset gains because the funds were in an IRA, and the guidelines for taking a loss didn’t apply to my situation. So, for more than two years, I kept on hoping to see a big upswing that would lift these funds back into sight of black ink, until finally I realized thinking about the loss was causing me more stress than just accepting it and moving on.
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So, I sold both positions almost nine months ago, took a $2,000 loss, moved the money into low-cost index funds and haven’t worried about it a moment since. Those funds are still down over $1,000 today.
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The whole point of a low-cost index fund strategy is to put your money into the market and not worry about it. I realized these two funds were the opposite of that. I was spending way too much mental energy worrying about their ups and downs. I also felt guilty that I was advising other people that I was having trouble following myself.
It goes to show, knowing better doesn’t always mean doing better. Knowledge isn’t power without action.
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