I’m sure everyone has been seeing what’s going on currently with the market. I keep hearing “locking in losses” when people are saying they want to move their money to a safe fund. This doesn’t make sense to me in the slightest. I am currently losing money as well (obviously), and if I were to move to safe funds now I do feel as if I lost that money because I technically had 50k more yesterday. The argument is if I didn’t cash out it isn’t a loss but I’m still 50k less.
My buddy is arguing with the gambling example and that doesn’t make sense either. He says if you drop 20 and win 200, you didn’t “win” until you cash out. He says if you lose next hand and you’re back to 20 you’re still leaving with what you came with, no loss. To me, that is a loss because I could’ve had 220. He says I have a depression era mindset and I don’t know what that might even mean lol.
Say my house. I purchased it for 50k before Covid. After Covid it increased to no longer average human territory. That value/equity is mine. If 2008 on steroids rolls around and tanks the value, I lost what was once mine. That’s a loss because it was technically mine, I had it. Just because I didn’t cash it out doesn’t mean it wasn’t mine.
I need help on this one.
Edit- if I had 100k and it doubled and I immediately dumped into a guaranteed safe fund, people would be saying it was a great move. If I had 100k and dumped into a safe fund to “stop the bleeding,” some would be saying I’m locking in losses others would be saying there’s no real loss until I sell.
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If you bought 100k worth of stock and it’s worth 90k, you can either wait for the value to change some more, or you can lock in the value by selling the stock. Doesn’t matter how the stock changes after that, you sold for 90k, that’s no longer ever going to change; it’s locked in now. And since that’s lower than what you bought the stock for, you locked in a loss of 10k.
The way people view money isn’t entirely rational. People “anchor” to a point, even though it is arbitrary. Rationality is to make your next choice the best choice regardless of how you go to where you are today.
You’re on a bus trip from A to B, but during the trip it goes from a very affluent place to a very sketchy part of town. You wouldn’t think ‘oh man this is very sketchy, it could get worse so I better get off now whilst I can’.
The only thing that really matters is your final destination (when you sell). If you were asleep the whole time, then does it really matter that the journey (stock prices) went up (fascinating views) or down (sketchy part of town).
The phrase only pertains to stock investment moves in a taxable accounts. If there’s a dip and you have loses on the investment, you can sell and use the loses for tax reduction and carry forward. If done, in a mutual fund for example, the carry forward can negate future cap gains. Individuals can only carry forward 3k I believe on your regular taxes.
You are correct, it is a loss. To take your gambling example you could frame it as an opportunity cost, where you missed the opportunity to cash out with 220, but that is still a loss. The only difference is that when you do cash out you won’t see any indication of that lost opportunity in the payout calculation.
In my experience the only time I’ve seen this philosophy espoused by your friend is in gamblers and cryptobros (although there is significant overlap there). It is essentially a way of dismissing losses as immaterial to justify continuing to hold a position even when it may seem unwise. It doesn’t really have any logical or fiscal basis.
Although that said I wouldn’t necessarily advise to exit the stock market immediately after a drop – seek actual financial advice before doing anything that extreme.
You keep your money in the fund because it was once trading for higher and you believe it will go higher again. The safe fund wont lose much but it wont gain much either. This is not a universal truth, it is just what people believe will happen based on the past performance of the stock market. “Past performance does not guarantee future results.” is a disclaimer you often hear. This is very true in the short term, but the average funds go up over time.
The value of the investment can go to $0 meaning you’ve lost 100% of what you put in. Selling before that happens lets you limit the amount of loss you make. Selling at 90% or 80% of the original value leaves you with still some money that you can use elsewhere.
Holding a losing investment in hopes that it will rebound is perhaps not as wise as selling right now and accepting your current loss (locking it in) and reinvesting what remains of the value into something that will hopefully be profitable, or at the very least, lose value slower than the original investment.