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How to navigate the sunk cost fallacy

And bring your old, underperforming investments to Betterment

By John Wittig

Manager, Investment Advisor Representative, Betterment |

Published Mar. 18, 2024

illustration of person navigating maze in the shape of a brain

How to navigate the sunk cost fallacy Mar 18, 2024 4:09:13 PM And bring your old, underperforming investments to Betterment Let’s say you love Betterment. (The feeling’s mutual, by the way.) You have some old investments lying around, investments you’re leaning toward moving over here, but you can’t bring yourself to do it. Why? They’ve lost value as of late, and they’re now worth less than what you paid for them. In this scenario, you’re dealing with a dangerous animal: The sunk cost fallacy. Also known as the “breakeven” fallacy, it’s a phenomenon we’ve all likely experienced at some point. It's hard to sell anything at a loss, be they stocks, bonds, or Beanie Babies. Advisors often rely on hard facts to combat this thinking. For example: Did you know that an asset experiencing a 50% loss must see a 100% gain just to be made whole? That’s a long way to go. But most fallacies aren’t successfully fought with facts. Because we’re all human, and we often make decisions based on emotions. So here are two simple tips that can help you lean into these feelings, hurdle this mental roadblock, and give your old investments new life. Reframe the narrative Thinking of the move as “selling your losers” or “cutting your losses” is a surefire way to trigger feelings of loss aversion. It’s also a little overstated in this circumstance. Unlike selling your Beanie Baby collection, moving your old investments to your preferred broker isn’t swearing off the concept of investing altogether. You’re selling these stocks and bonds, yes. But that’s in order to buy other stocks and bonds with a different strategy for growth moving forward. Better yet, when you invest with Betterment, those new assets you just bought come with some shiny new bells and whistles. Features like automated rebalancing and tax-smart trading. Benefits designed to help maximize your returns. The longer you wait, the less time you have to use them. So think of the move in positive terms. You're not selling your losers and calling it quits. You're swapping them for a new strategy. Use reverse psychology If your brain’s going to insist on avoiding losses, let’s use that aversion against it. You can do that by shining a spotlight on the less obvious losses that could be slowly eating away at your old investments: fees and taxes. It’s 2024 AD, and it’s still pretty standard for advisors to charge 4 times the amount we do. That’s an extra 750 bucks vanishing for every $100,000 of investments. Then there’s the cost of the investments themselves. The average mutual fund expense ratio can be up to 5 times(!) that of the typical exchange-traded fund (ETF). Worse yet, you may have to pay taxes on a mutual fund even when the fund loses money. A loss by any other name is still a loss. And all of the examples above could be causing your old investments to bleed value. The sooner you make a switch, the sooner you can stop the bleeding.

Let’s say you love Betterment. (The feeling’s mutual, by the way.)

You have some old investments lying around, investments you’re leaning toward moving over here, but you can’t bring yourself to do it.

Why? They’ve lost value as of late, and they’re now worth less than what you paid for them. In this scenario, you’re dealing with a dangerous animal:

The sunk cost fallacy.

Also known as the “breakeven” fallacy, it’s a phenomenon we’ve all likely experienced at some point. It's hard to sell anything at a loss, be they stocks, bonds, or Beanie Babies.

beanie-doughnut-chart

Advisors often rely on hard facts to combat this thinking. For example: Did you know that an asset experiencing a 50% loss must see a 100% gain just to be made whole? That’s a long way to go.

But most fallacies aren’t successfully fought with facts. Because we’re all human, and we often make decisions based on emotions.

So here are two simple tips that can help you lean into these feelings, hurdle this mental roadblock, and give your old investments new life.

Reframe the narrative

Thinking of the move as “selling your losers” or “cutting your losses” is a surefire way to trigger feelings of loss aversion. It’s also a little overstated in this circumstance.

Unlike selling your Beanie Baby collection, moving your old investments to your preferred broker isn’t swearing off the concept of investing altogether.

You’re selling these stocks and bonds, yes. But that’s in order to buy other stocks and bonds with a different strategy for growth moving forward.

Better yet, when you invest with Betterment, those new assets you just bought come with some shiny new bells and whistles. Features like automated rebalancing and tax-smart trading. Benefits designed to help maximize your returns.

The longer you wait, the less time you have to use them.

So think of the move in positive terms. You're not selling your losers and calling it quits. You're swapping them for a new strategy.

Use reverse psychology

If your brain’s going to insist on avoiding losses, let’s use that aversion against it.

You can do that by shining a spotlight on the less obvious losses that could be slowly eating away at your old investments: fees and taxes.

It’s 2024 AD, and it’s still pretty standard for advisors to charge 4 times the amount we do. That’s an extra 750 bucks vanishing for every $100,000 of investments.
Then there’s the cost of the investments themselves. The average mutual fund expense ratio can be up to 5 times(!) that of the typical exchange-traded fund (ETF).
Worse yet, you may have to pay taxes on a mutual fund even when the fund loses money.

A loss by any other name is still a loss. And all of the examples above could be causing your old investments to bleed value. The sooner you make a switch, the sooner you can stop the bleeding.

Considering a switch?