Two investors each own ten units of the same fund, priced at $80 per unit. Investor A paid $100 and wants to wait for break-even. Investor B paid $60 and wants to sell to lock in a win.
Each has an $800 holding. Why does one want to stay while the other wants to leave?
Their purchase prices give them opposite feelings about the same $800. Their cash needs and tax bills might still justify different choices.
When an old price becomes a target
Anchoring means giving a starting number too much influence over a later judgment. You paid $100, so $100 starts to feel like the price the fund belongs at.
Purchase history belongs in your performance records and can affect taxes. The error is treating it as evidence that the fund will return to $100.
Break-even fixation means making a return to your purchase price the condition for selling. A round number or a remembered high can become just as sticky.
The fund has no appointment with your $100. Your purchase price does not tell you what the fund will earn from $80.
The current $80 price starts the comparison; it does not forecast returns. The optional price versus value lesson explores how to estimate what an investment is worth.
One holding, two opposite urges
A spent 10 × $100 = $1,000. B spent 10 × $60 = $600. Each holding is worth 10 × $80 = $800, leaving A down $200 and B up $200. Those results are unrealized: neither has sold.
The scale puts $80 between the two purchase prices. One investor sees a loss and the other a gain, though both own the same thing.
If the next price were $90, the gain from $80 would be identical:
Either holding would rise from $800 to $900. A would still be below the original cost; B would be further ahead. A different receipt does not change the gain from that $10 move. A further fall would also hit both holdings equally in dollars.
The disposition effect is the tendency to sell investments with gains more readily than those with losses. Terrance Odean's 1998 study examined stock trading using records from 10,000 accounts at a US discount broker over 1987–1993.
Across the sample, investors sold a larger share of the winners available to sell than of the losers. The pattern survived his checks for rebalancing and trading costs. It does not tell us whether A or B has a sound reason to sell.
The earlier loss-aversion lesson explains why accepting a loss can be hard. An anchor supplies the price you want back. These can help explain the urge; the disposition effect names the selling pattern, which can have several causes.
Keep history in its proper role
A sunk cost is past spending of money, effort or time that you cannot recover. Holding a fund longer cannot reclaim the hours you spent researching it. The facts you found may still matter. The hours you spent are gone.
The ten fund units still have an $800 sale value. A's $1,000 purchase is history; keeping the remaining $800 in this fund is a choice.
“It isn't a loss until I sell” misses the $200 already lost from A's market value. Selling realizes the loss; it does not cause that $200 decline. Future gains could recover it, but wanting them does not make them likelier.
A loss can be unrealized and still be real.
In a US taxable account, adjusted basis is the amount compared with sale proceeds to figure a taxable gain or loss. It can differ from the purchase price, so the example's costs are not a tax calculation.
| Use purchase history for | Use current facts for |
|---|---|
| Performance records | Reasons for holding |
| Checking US tax basis | Cash needs and portfolio fit |
Your tax residence and account type matter; the capital-gains tax lesson offers optional US detail on basis and selling.
Would you buy it with $800 in cash?
Imagine your holding as cash. The fresh-buy question asks whether the same fund still fits your goals and portfolio.
Give A and B the same goals, other holdings and ability to bear risk. In our comparison, their $800 calls for the same analysis. Changing the purchase receipt gives neither investor a better fund.
A “no” starts a review; it does not send a sell order. You might prefer a slightly cheaper fund for new money while a tax bill makes switching your existing holding costly. The when-to-sell framework brings those trade-offs into the decision.
A current reason for holding sounds different from “I'll wait for $100”:
- Reason. This fund provides the broad mix of stocks my plan calls for.
- Fact that could change it. My other holdings leave me with more in stocks than my plan allows.
- Constraint. I need some of this money for rent next month.
Use the confirmation-bias check to challenge this reason for holding before the old price takes over.
We still need A's and B's goals, cash needs, other holdings and sale consequences before choosing an action. If “I paid $100” is your whole reason, the fresh-buy question has exposed missing information.
A purchase price can tie a decision to one old number. Next, recency bias shifts attention to a different influence: the last stretch of returns.
In short
- Purchase history belongs in performance records and may matter for taxes.
- Two identical holdings face the same next price move, whatever their owners paid.
- Selling winners and keeping losers is a pattern to examine; either choice can have a sound reason.
- The fresh-buy question starts a review. Cash needs, taxes and sale costs belong in the decision.