Investment Losses, Sunk Costs, and the Question to Ask Before Selling
Seeing an investment fall below its purchase price can make a simple decision feel personal. It is tempting to wait until it “gets back to even” before deciding what to do.
I have found it more useful to ask a different question: If I had the current value in cash today, would I choose to invest it in this holding as part of my portfolio?
That question does not tell you automatically to sell. It helps separate the decision you face now from the money you spent in the past.
Educational note: This is a decision-making framework, not individualized investment advice. It does not account for your tax situation, transaction costs, or the details of any particular security.
Why the purchase price can distort the decision
The purchase price is useful for calculating performance and may matter for taxes. But it cannot be changed by waiting. Whether you keep the investment depends on what you believe about its future role, risk, and alternatives—not on the hope that the market will return to your entry price.
A loss can encourage two opposite mistakes:
- Holding only to avoid realizing a loss: You may keep an investment that no longer fits your plan because selling would make the loss feel final.
- Selling only to stop the discomfort: You may abandon a position after a decline without checking whether your original reason for holding it has changed.
Neither the purchase price nor the recent price movement is, on its own, a complete investment thesis.
Review the position as it is today
When reviewing an individual holding, write down:
- Purpose: What role does this holding play in my portfolio?
- Thesis: What would need to be true for me to keep owning it?
- Risk: What could make the investment fall further, and how much loss can I accept?
- Size: What share of my total portfolio does it represent now?
- Alternative: If I sold, where would the money go—and why would that be a better fit?
- Costs: What taxes, fees, or currency effects could a sale create?
This exercise changes the comparison from “loss versus no loss” to “current holding versus the best available use of this money.”
Decide whether the investment still belongs
If the original reason for buying has changed, the position is larger or riskier than intended, or you would not choose it today, selling can be a reasonable decision—even if it means realizing a loss.
If the investment still fits your plan and its size is within a limit you chose beforehand, holding may also be reasonable. A decline does not prove the thesis is wrong, just as a recovery to the purchase price would not prove it was right.
For a concentrated or thematic investment, consider defining a maximum portfolio weight. A small, bounded position can express a view without making the entire plan depend on one sector, commodity, or prediction.
Keep the portfolio goal in view
One holding should be judged in the context of the whole portfolio and the goals the portfolio serves. Money intended for a near-term expense may not belong in a volatile investment at all. Money set aside for long-term goals may be able to tolerate more variation, depending on your circumstances.
A written plan can make the next decision less reactive. It can state the role and maximum size of a position, when you will review it, and what evidence would change your mind.
The useful question is not “How do I get back to even?” It is “Given what I know today, is this still where I want this money invested?”