The Anchoring Trap: Why Your Purchase Price Shouldn't Guide Sell Decisions

The quiet problem most investors miss

When you buy an investment, that purchase price becomes psychologically significant. It's your reference point—the number against which you measure success or failure.

But the market doesn't know or care what you paid. Your purchase price contains no information about whether an investment should be held or sold today. Yet investors consistently make decisions based on this arbitrary anchor.

How this actually works

Anchoring is a cognitive bias where we rely too heavily on the first piece of information we encounter (the "anchor") when making decisions.

In investing, common anchoring patterns include:

Refusing to sell at a loss. "I bought at $100, so I won't sell until it gets back to $100." This ignores whether the investment is likely to recover, whether better opportunities exist, and whether the capital could work harder elsewhere.

Selling at arbitrary gain targets. "I'll sell when I'm up 20%." Why 20%? Because it's a round number relative to your purchase price. It has no connection to whether 20% up is fair value, overvalued, or still cheap.

Averaging down reflexively. "It dropped 30% from my purchase price, so now it's a bargain." The drop from your purchase price doesn't make it cheap—only the relationship between current price and underlying value does.

Ignoring current fundamentals. Anchoring keeps investors focused on past prices instead of current information. What matters is whether an investment is attractive at today's price, not yesterday's.

Where people get this wrong

Treating purchase price as meaningful. Your buy price was determined by market conditions at a specific moment. It doesn't represent fair value, your break-even point, or any other economically significant level.

Confusing paper losses with real losses. An unrealized loss is economically identical to a realized loss. Refusing to sell doesn't make the loss any less real—it just keeps it off your tax statement.

Making sell decisions to feel better, not to optimize. Selling after recovering to break-even feels satisfying. But if the investment is still attractive, selling to feel even is leaving money on the table.

Ignoring opportunity cost. Capital stuck in a poor investment waiting to "get back to even" is capital not working in better opportunities. The anchor prevents rational reallocation.

What to focus on instead

• Ask: "Would I buy this today?" If you wouldn't purchase this investment at today's price, why are you holding it? The only reason to own something is if it's the best use of that capital going forward.

• Evaluate investments independently. Each holding should justify its place in your portfolio based on current prospects, not past prices.

• Consider tax implications rationally. Sometimes realizing a loss provides tax benefits. Sometimes it doesn't. Make this calculation based on math, not emotional attachment to break-even.

• Remove price alerts tied to purchase price. Setting an alert for "when it gets back to $100" reinforces the anchor. If you're going to set alerts, tie them to fundamental values or target allocations.

How this connects to long-term outcomes

Anchoring leads to two wealth-destroying patterns: holding losers too long and selling winners too early. Both stem from treating an arbitrary purchase price as meaningful.

Over an investing lifetime, the cumulative impact is significant. Capital trapped in poor investments waiting for arbitrary recovery targets is capital not compounding elsewhere. Winners sold at round-number gains miss subsequent appreciation.

The antidote is to think like a portfolio manager evaluating fresh capital. Each day you hold an investment, you're implicitly choosing it over all alternatives. Your purchase price is irrelevant to that choice.

The market is forward-looking. Your decisions should be too. What you paid is history. What matters is what happens next.