By Dr. Jim Dahle, WCI FounderOne of the silliest myths out there in the personal finance and investing world is the phrase, “You don't lose money until you sell.” The problem with the phrase? It's totally false.
Why People Say It
Why do people say this? It's for two reasons. First, it helps people feel better about the fact that they lost money. It's just a nice thing to say. Kind of like, “Yeah, my 401(k) went down in value, too. We'll both be working here until we die!”
The second reason is that it might help improve an investor's ability to stay the course. It's a psychological trick. “Don't panic sell; you didn't really lose money.” If it keeps someone from abandoning a well-thought-out, long-term plan, great, keep saying it. But don't pretend it's actually accurate.
You Really Did Lose Money
Let's sit back and think about this. Let's say you own $100,000 in a stock index fund. A bear market happens, and the value drops to $78,000. How much money have you lost? You've lost $22,000. There is no other accurate way to look at it, I'm sorry—at least as long as you ignore taxes and inflation/deflation. If you had sold before the bear market, you would have had $100,000 in cash. If you sell now, you will have $22,000 less, i.e. $78,000. You lost money.
More information here:
Should You ‘Take Money Off the Table?'
You Might Not Care That You Lost Money
However, the fact that you lost money may not matter much to you. I lose money all the time. There are white coat investors who lost six, seven, and perhaps even eight figures in the 2022 bear market. If they have a solid long-term investment plan, they probably don't care much. Why not? It's because they don't plan to spend that money for 20, 30, or even more years. They expected the investment to be quite volatile over those decades, but they only really care about the price difference between when they bought and when they will sell (along with any income paid and what it was reinvested at).
Selling Prevents Further Loss (or Gain)
There are a couple of things that selling does do, however. The first is that it prevents further loss or gain. Once you sell, you will miss out on any future appreciation and income from the investment. Of course, you also avoid future losses. You're out of the game. If it's a good investment (and you should only buy good investments) and you don't need the money, that's usually a bad thing. Note that a good investment is NOT just an investment that makes money or that only goes up. You must also consider risk. Investing is far more about risk control than chasing returns.
More information here:
An Appropriate Amount of Investing Risk
The Perspectives of an Older Investor vs. a Younger Investor
Selling Induces Tax Consequences
The other thing selling does is induce some tax consequences. These consequences might lower your tax bill (like tax-loss harvesting) or increase it (like realizing a capital gain). But realizing those consequences has nothing to do with whether you lost money. That just affects which consequences are realized. There's a reason your brokerage has two separate pages: realized gains (losses) and unrealized gains (losses). But they're both real losses.
3 Problems with “You Don't Lose Money Until You Sell”
Why do I care if people say this? While it does have the potential to encourage staying the course with a solid financial plan, it also has the potential to encourage bad behavior in three different ways.
#1 Causes Inappropriate Anchoring
People naturally “anchor” to the highest value their investment ever reaches. If their Bitcoin hits 70,000, they think it's worth $70,000, even if they paid $33,000 for it and the market is telling them it is worth $19,000. Telling them they really aren't making or losing money as the value of their investment fluctuates causes them to anchor even more. This can cause them to think they are richer than they actually are and to make bad spending and career decisions because of it. If you don't really lose until you sell, you don't really make money until you sell, either, and you should be anchoring to the purchase price, not the highest price it ever hit.
But our brains don't do that. And there are no benefits to anchoring anyway. It's just a behavioral finance mistake.
#2 Keeps People from Selling a Bad Investment
Perhaps the biggest problem is when this phrase is used, and it isn't referring to a good investment in a well-thought-out investment plan. Let's say someone bought Tesla stock and believes that they didn't lose money until they sell.
This is what Tesla's stock looked like in early 2024.
Let's say they bought it in November 2021 at $400 when it was near its peak. Since then, it's dropped 59%.
As an individual stock, it's not a good investment because it introduces uncompensated risk. (Note that this has nothing to do with whether Tesla is a great company or whether it might even have great future returns.) It hurts to admit you lost money, and some people, believing that you don't really lose money until you sell, would hold on to this stock until it got back to $400 before selling. However, it might be just as likely to go to $0 as $400. Their false belief led them to avoid selling a bad investment, and it resulted in further losses.
#3 Keeps People from Tax-Loss Harvesting
In a taxable account, there is little reason to ever hold on to even a good investment that is underwater. You should generally tax-loss harvest those investments. This allows you to maintain essentially the same portfolio, but to acquire a tax loss that will reduce your tax bill in the short and long term. But if you believe you haven't lost money until you sell, you are less likely to engage in beneficial tax-loss harvesting.
More information here:
Is Tax-Loss Harvesting Worth It?
In short, when people say “You don't lose money until you sell,” what they're really doing is revealing their own lack of investing acumen. You don't have to argue with them and hurt your relationship, but you could help them by sending them a link to this article. Let me be the bad guy.
What do you think? Do you lose money if you don't sell? Why or why not?
What is the purpose of this article? There is nothing informative in here. With respect, it feels like an article one writes when there is nothing else to write about.
You’d be surprised how many very intelligent people hold this erroneous viewpoint, and it can lead to many behavioral errors, some of which Jim correctly pointed out (e.g., not selling a bad investment).
Just a rant about an erroneous viewpoint. The counterpoint? It’s just semantics.
If you didn’t find it useful, hopefully we’ll run something better tomorrow.
dude (actually, dudette) Samantha I think the point of this article is very important from a behavioral standpoint. as Jim mentions you might hold onto losing investments too long because “you don’t lose money until you sell.” If you thought that you’re losing money despite not selling, then you would behaviorally not have any problems selling your losers.
What is pretty fascinating to me is the corollary to this “you don’t lose money until you sell” should be “you don’t make money until you sell” but investors (speculators?) tend to think that a stock or bitcoin or whatever might keep rising and they don’t have a plan to sell. They let their winners ride alongside of never selling their loses/letting their losers ride. They let recency bias of their investment going up stop them from selling.
Excellent post, and I’ve long argued the same point myself. It’s a Jedi mind trick that investors try to play on themselves.
Another problem with this mindset is that it often causes investors to believe that their shares alone represent their wealth rather than the market price of all the shares they own. This erroneous view has led many to focus heavily on dividend paying stocks, which can lead to all sorts of issues.
The ‘inappropriate anchoring’ behavioral error is an interesting one. Never really thought about that before, but I’m guilty of it from time to time. Hard not to be.
The article is spot on, but I mainly wanted to put in a plug for NewRetirement which I’ve been using for a few months now(without the discount, oh well). The scenarios and advice are generally good though specific recommendations are often dependent on your opinion of how the economy performs in the future. That actually relates to what I feel is a major strength of the program, which is being able to play around with different scenarios and see how things change. My wife is not really interested in finances but easily understands the concepts in the website and likes having everything in one place.
It also provides a number of reminders to help get your portfolio and eventual estate set up properly. It’s already jogged my memory to take care of a few loose ends. They do try to encourage you to use their advising services (at an extra cost) but not very aggressively
I’ve been retired for about a year so am coming at it from that perspective. I also see people using it to plan for early retirement and think it would also be very useful for that. I have no financial interest at all in NewRetirement, just saying my experience so far gets a thumbs up.
Maybe it’s all semantics.
I liked this comment on Bogleheads.
“ HMSVictory
Re: “You don’t lose money until you sell”
Post Thu Mar 10, 2022 6:14 am
Market values go up and down every day with the fluctuation of the market. Market value lets us know what the portfolio is worth right now.
You don’t lock in a LOSS until you sell it for less than you paid for. Same principal applies for gains.
Stay the course!”
I agree with the fact that it causes people to anchor to an investment or be emotionally attached to it when it’s not a good investment, or perhaps it was a good investment and no longer is. Emotion and investing is more intertwined than many people might assume. Sometimes, you need to sell so you can use the money for your goals, that’s what money is about.
You own exactly the same number of shares after a market selloff as before it. The exact same number. Nothing has changed but what the market is willing to offer for those shares in this particular moment.
Owning a share of stock is fundamentally about owning a stream of dividends extending far out into the future and owning the future growth of those dividends/earnings. I think too many “investors” today have forgotten this fact and treat their investments as price values on a graph that’s completely dissociated from tangible reality.
Yes, you have “lost” money if you need to sell RIGHT NOW. But, unless something fundamentally has changed (and it very likely has not), if you liked the potential future returns before a sell off enough to own shares, you ought to REALLY like the potential future returns after a sell off.
Mark, well stated.
No sell, no loss, no gain.
The example given in the article goes on to prove this same point.
“Let’s say you own $100,000 in a stock index fund. A bear market happens…If you had sold before the bear market, you would have had $100,000 in cash. If you sell now, you will have $22,000 less, i.e. $78,000. You lost money.”
Of course, because “you sell now”!
To go with the title, it will be nice to see a scenario where there will be a realized loss WITHOUT selling. That will debunk the “silly myth”.
The flipside is that my wife does not believe that gains are real until they are converted to cash. To her equities are mere speculation and their supposed values meaningless. It only feels real to her when it is converted to cash.
As we are just entering retirement, she gets excited when I follow our investment strategy to convert equities to cash to derisk our portfolio (as discussed in Jim’s article “whether you should take money off the table”). Indeed, this past March 1st I realized our portfolio was up substantially over the past four moths.
So I moved a chunk of that gain into CDs paying around 5% (all of this in IRA). That increased our fix income allocation to allow breathing room if the market tanks.
I have tried to explain to my wife that the equity portion is indeed real and that it is likely to continue to go up in the future. But, she only feels happy when it is cold hard cash (or CDS, term annuities, etc). I think people do not generally understand that equities are indeed real.
Hmmm… I think I disagree. The phrase “you don’t lose money until you sell” seems at least true in a sense. Just like how timing the market requires both buying and selling at the right time.
So for example, if you invest in something very volatile (like maybe crypto?)… you may make a lot of money and lose a lot of money in the same day. But if you hold for a year and break even when you sell, it would be weird to say you lost money (or made money) in crypto.
Is this a pet peeve of yours? Seems like an odd distinction to take issue with.
I couldn’t agree more with the sentiment that “You Don’t Lose Money Until You Sell” is misleading. While it might offer temporary comfort during market downturns, the reality is far more nuanced. The value of investments can fluctuate dramatically, and ignoring these fluctuations can lead to significant losses if not addressed strategically. It’s crucial to maintain a realistic perspective and actively manage investment portfolios to mitigate risk and maximize returns. Ignoring market dynamics in favor of a simplistic mantra is a recipe for financial disappointment.
The VTI is never a bad investment
Never is a very dangerous word.
Flip this logic around for when you have an unrealized gain- this will continue to fluctuate until you decide to sell.
The correct answer is the market price reflects a paper loss or gain but once realized you need to deal with the tax consequences and also lost opportunity costs.
Yes Mike that’s what I’m saying. To stress JUST the side of the loss in current redemption value as being a loss, but not the gain if you were theoretically up on paper, is rich coming from people who think that indexes will go up forevermore (most on this site). I have no problem technically with either side, but … state both sides, please. You could be just as easily ANCHORED to a “winning” position that you aren’t selling, either.
If you have done your research, you should know if you bought for the wrong reasons, or if you just missed out on something that was hard to see, but now shows you that you should sell.
If ‘you don’t lose money until you sell’ is a fallacy, at what point do you sell a stock (both loses and gains, what is the number 5%)? Thanks.
Outside of tax loss harvesting, I don’t sell “stocks” (meaning broadly diversified index funds) unless I need to spend the money. Certainly not because it went up or down 5%.
If you’re buying individual stocks instead of index funds, you probably ought to stop doing that.
https://www.whitecoatinvestor.com/picking-individual-stocks-is-a-losers-game/
I would say that “You don’t lose money until you sell” is true, what your are losing when a stock/fund goes down is value. When you sell a stock you are converting value to money, a stock itself is not money.
Lots of people would say that. That’s why I wrote this article. Because I think those people are wrong. 🙂
Pure idiocy. YOU DO NOT lose or gain until you sell. That’s why it’s called REALIZED gains and losses. Having the belief that you don’t lose until you sell which, if it prompts people not to sell, is an ENTIRELY psychological issue. If I have a stock I bought at $100 and it declines to $10 and hold it, then in 15 years goes to $300, there is NO gain or loss until sold – I have NO realized gains or losses.
I disagree, as noted in the post. Not sure how much better I can explain it. If you think your share didn’t lost value, go ahead and realize your current value at $10 a share to see if you’re right and you’ll find out you really do have less value than when the share was worth $100.