Throwing Good Money After Bad: Why We Can't Let Go of Losing Investments

You bought a stock at £50. It's now £22. You know, deep in your bones, that you should sell. Instead, you buy more. "Averaging down," you whisper to yourself, like a wizard casting a spell against the market gods.

Welcome to one of the most expensive habits in personal finance: the sunk cost fallacy. It's what makes us sit through terrible films because we paid £14 for the ticket, finish awful meals because we've already ordered them, and — most damagingly — cling to losing investments like they're a childhood teddy bear we cannot bear to part with.

Let's talk about why we do this, why it's costing us serious money, and how to finally let go.

The Brain's Most Expensive Bug

Here's the uncomfortable truth: your brain treats a £1,000 loss roughly twice as painfully as it treats a £1,000 gain feels good. This is called loss aversion, and it's been rigorously demonstrated by economists Daniel Kahneman and Amos Tversky, who won a Nobel Prize for pointing out that humans are, essentially, walking irrationality machines.

So when your portfolio shows red, your brain doesn't process it as information. It processes it as pain. And the easiest way to avoid pain? Deny it. Don't sell. Because a paper loss isn't a "real" loss, right?

Wrong. That £22 stock is worth £22 whether you sell it or not. The market doesn't care about your original purchase price. It has never heard of you. It doesn't know you exist. Your cost basis is a number that matters only to you and to HMRC at tax time.

Yet we keep holding, hoping, waiting for that magical moment when the stock "gets back to what I paid for it." Which brings us neatly to...

The Break-Even Delusion

"I'll sell when it recovers to what I paid." This sentence has probably cost British investors more money than every scam email combined.

Here's the maths problem nobody wants to do. If a stock drops 50%, it needs to rise 100% just to get you back to even. Drop 70%? You need a 233% recovery. Drop 90%? You need a glorious 900% comeback just to break even.

Now, does that recovery ever happen? Sometimes. But while you're waiting for your dud to perform miracles, your money could be sitting in something — literally anything — that grows at a boring, reliable 7% a year.

The break-even point is a psychological anchor, not a financial one. The market doesn't owe you a refund.

Why "Averaging Down" Is Often Just Doubling Down on Bad Decisions

Averaging down — buying more of a falling stock to lower your average cost — sounds sophisticated. Charlie Munger does it. Warren Buffett does it. Surely you should too?

Here's the catch: they do it when a great business is temporarily mispriced. Most of us do it when a bad business is correctly priced downward, and we simply refuse to accept it.

Ask yourself this brutal question: "If I didn't already own this, would I buy it today at this price?"

If the answer is no, you're not investing. You're rescuing. And rescuing a bad investment with fresh capital is like giving your unreliable cousin another loan because the first three didn't get repaid. The problem isn't the amount — it's the cousin.

Averaging down turns a small mistake into a large one. It concentrates your portfolio into your worst ideas rather than your best. Which is, when you think about it, the exact opposite of what any rational strategy should do.

The Opportunity Cost Nobody Talks About

Here's where it really stings. Every pound trapped in a losing investment is a pound not earning returns elsewhere.

Say you're sitting on £5,000 of a stock that's down 60%. You're mentally waiting five years for it to "come back." Meanwhile, that £5,000 in a low-cost global index fund earning around 7% annually would grow to roughly £7,000 in the same period.

That's not just a missed gain. It's an invisible loss. And because it's invisible, we ignore it entirely.

Investors track the losses they can see and completely ignore the ones they can't. This is why smart investors think in terms of best current use of capital rather than what I paid. The past is a sunk cost. The future is where returns come from.

The Cinema Ticket Test

Here's a mental trick that works surprisingly well. Imagine you paid £14 for a cinema ticket. Twenty minutes in, the film is dreadful. Do you stay because you paid, or leave because your time is more valuable?

Rationally, you leave. The £14 is gone either way. Staying doesn't get it back — it just adds two hours of boredom to the cost.

Now apply this to your portfolio. The money you lost is already lost. It's gone whether you hold or sell. The only question that matters is: where should today's capital be? Not yesterday's. Not the capital you had before this went sideways. Today's.

If you inherited your current portfolio from a distant, slightly incompetent aunt tomorrow, and had no emotional attachment to any of the holdings — what would you keep? What would you sell immediately?

That answer is usually different from what you're actually doing. Which tells you everything.

Selling Losers Is Actually Tax-Efficient (a Small Consolation)

Here's a genuinely useful piece of news for UK investors: if you hold shares outside an ISA or SIPP, selling losers can offset capital gains elsewhere. Realised losses can be used against gains in the same tax year, and unused losses can be carried forward indefinitely, provided you register them with HMRC within four years.

So that dog of a stock you've been avoiding? Selling it might not just free up capital — it could reduce your tax bill on your winners. The government, for once, is quietly rewarding you for admitting defeat.

Just watch out for "bed and breakfasting" rules (you can't sell and rebuy the same share within 30 days to harvest the loss). But you can absolutely sell a losing position and buy something similar-but-not-identical — say, swapping one FTSE tracker for another provider's version.

Turning a mistake into a tax saving is one of the few silver linings in investing. Take it.

How to Actually Let Go

Right. Enough theory. Here's what to do this weekend:

1. List every holding and write down what you'd do if you inherited it fresh today.
2. Anything you'd sell, sell it. This week. Not "when it recovers." Now.
3. Redeploy the cash into whatever your best current idea is — even if that's just a boring global index fund.
4. Set a rule for the future: any position that falls more than a set percentage (say, 25%) triggers a re-evaluation, not a knee-jerk buy or sell, but an honest question — would I still buy this today?

The single biggest predictor of long-term investing success isn't picking winners. It's cutting losers before they eat your portfolio alive.

The Bottom Line

Your original purchase price is a story you tell yourself. The market doesn't care. Your future returns don't care. Only your ego cares.

Letting go of a losing investment doesn't mean you failed. It means you learned faster than the person still white-knuckling the same stock three years from now. The money you free up today has decades left to compound. The money stuck in your worst position has nothing left to do but disappoint you.

Sell the losers. Buy the boring index fund. Go for a walk.

Your future self, sitting on a considerably larger portfolio, will thank you.