What You Paid Doesn’t Matter
Your purchase price shouldn’t determine what you do next.
What This Means
Investors often get anchored to the price they paid for an investment.
If you bought a stock at $100 and it falls to $70, it’s easy to think, “I’ll sell when it gets back to $100.”
But your purchase price doesn’t determine what the investment is worth today.
A better question is:
“If I didn’t own this investment today, would I buy it right now?”
If the answer is yes, continuing to own it may make sense. If the answer is no, waiting simply to get back to your purchase price may not be a good reason to keep it.
Investment decisions should be based on what you believe the investment is worth today and where you think it is going from here.
Common Questions
Should I sell a stock just because it has gone down?
No. A falling stock price by itself isn’t necessarily a reason to sell. It’s a time to reassess how you believe the company will do going forward. The more important question is whether you still believe in the investment and would be willing to buy it at its current price.
Why do investors anchor to the price they paid?
Because losing money is emotional. When an investment falls below what you paid, it’s natural to want to get back to even before selling. That original price becomes a mental target, even though it has nothing to do with what the investment is worth today or where it may go from here.
Sometimes the most profitable thing you can do is take the loss and reposition that money into an investment you believe has better potential going forward.
Is there anything positive about taking an investment loss?
Yes. In a taxable account, a realized investment loss may be used to offset capital gains, which can potentially reduce your tax bill. So while nobody likes taking a loss, it may have some tax value that can be used against gains now or potentially in future years.
Remember This:
Don’t let the price you paid keep you in an investment you wouldn’t buy today.