7 psychological money traps and how to avoid them
7. The lost-money fallacy
Once we own something -- a house, an investment stock, a car -- we often irrationally keep it or even put more money into it, even when it's time to walk away.
That's exactly why folks are often hesitant to sell losing stocks, says Cheryl Krueger, president of Growing Fortunes Financial Partners in Schaumburg, Ill. "Although everyone knows stocks aren't guaranteed, some people irrationally want to hold on to loser stocks 'until they earn their money back,'" she explains. "This can be especially dangerous for people with very few stocks in their portfolio, since they don't have much diversification to begin with." However, while they wait for the stock's price to go up, they could actually lose money on more appropriate investments.
Other examples: You continue making expensive repairs to your older car because you don't want to "lose" the repair money you invested in the car last month, three months earlier and six months before that. In today's market, you might also feel antsy about selling your house for 15 percent less than you bought it, even though you know the sale price is reasonable today.
How to outsmart your brain: Remind yourself that spent money no longer figures into your financial decisions. It's gone. Would you buy that losing stock today, given its performance, if you didn't already own it? If not, it's time to sell. Next time, establish a stop-loss limit (the price at which you will sell a stock) as soon as you buy it, before you get attached to it. Finally, would you put $1,000 into repairing that beater car if a relative had given it to you for free last week? If not, leave the mechanic's shop -- now. You're trying to financially prop up a sinking ship.