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In the world of investing, loss aversion is a cognitive bias which means your losses hurt twice as bad as any gains of the same value. It can be one of the most common (and challenging) hindrances to overcome in making sound investment decisions, and might also cause you to develop a case of “Get Even-itis”.READ THE ARTICLE
Holdings held hostage: As described here, Get Even-itis is “the reluctance to sell an investment that is trading below the original purchase price.” In theory, it causes you to hold onto an investment with the belief that you can sell it later on when it gets back to even. However, the main issue with this behavior is that for long-term investors in particular, allowing the past purchase price to play into the process of building your portfolio can prevent you from switching to a more efficient alternative.
On the topic of taxes: The only exception here applies to your taxable investment accounts. When investments are sold above their purchase price, a capital gains tax ensues. At the same time, when an investment is sold below its purchase price, the result is capital loss. In this instance, however, losses can offset capital gains if there are more losses than gains available. This is where tax loss harvesting strategies can come into play, but only for those traditional brokerage accounts.
Don’t look back: When it comes to tax-deferred accounts, such as IRAs, Roth IRAs and retirement savings plans, investment decisions should be based on market conditions today. Above all, you should always ask yourself, both in business and in life, if what got you here, will get you there.