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Started By
Message
Sunk Cost Fallacy - Help!
Posted on 3/8/23 at 4:14 pm
Posted on 3/8/23 at 4:14 pm
Seeking MT to set me straight.
I am very familiar with SCF. Yet, I find myself exhibiting it as we contemplate ways to fund a large purchase decision.
Choosing between 2 accounts from which to pull $ for this purchase:
Account 1 - money market account that has made nil for years. Real rate (net of inflation) is negative, unrealized as it may be.
Account 2 - overweighted company stock that has positive Real rate (and pulling from this account re-balances allocation, but that is beside the point (as is the tax efficiency part of the decision that I am purposefully leaving out of this post))
SCF:
I am staring at the unrealized negative real rate on the money market thinking I do not want to realize the negative real rate, so thinking will not tap that account. But, this is SCF thinking. Or, is it?
MT, lay your objective financial sense into this decision, please.
I am very familiar with SCF. Yet, I find myself exhibiting it as we contemplate ways to fund a large purchase decision.
Choosing between 2 accounts from which to pull $ for this purchase:
Account 1 - money market account that has made nil for years. Real rate (net of inflation) is negative, unrealized as it may be.
Account 2 - overweighted company stock that has positive Real rate (and pulling from this account re-balances allocation, but that is beside the point (as is the tax efficiency part of the decision that I am purposefully leaving out of this post))
SCF:
I am staring at the unrealized negative real rate on the money market thinking I do not want to realize the negative real rate, so thinking will not tap that account. But, this is SCF thinking. Or, is it?
MT, lay your objective financial sense into this decision, please.
5
Posted on 3/8/23 at 5:37 pm to Turf Taint
What’s the purpose of the two accounts?
If you use the company stock, will you buy more of it with the money market funds? If the answer is no, then use the company stock.
If you didn’t own any company stock right now and had all the money in cash, would you buy as much of it as you currently own? If the answer is no, use the company stock.
If you use the company stock, will you buy more of it with the money market funds? If the answer is no, then use the company stock.
If you didn’t own any company stock right now and had all the money in cash, would you buy as much of it as you currently own? If the answer is no, use the company stock.
Posted on 3/8/23 at 6:04 pm to Turf Taint
quote:
as is the tax efficiency part
Seems like the most important part of discussion?
Posted on 3/8/23 at 9:15 pm to Turf Taint
If you had the $ to invest today where would you put it?
Draw funds from the one you wouldnt choose to be invested in.
Since you're overweight company stock why not sell some to cover purchase? Then, with the MM funds invest in something you prefer moving forward. Improve investment growth potential and reduce concentration in company stock.
Did you expect to make $ in a MM fund? Do you think you will moving forward? Dont expect real growth in MM.
Draw funds from the one you wouldnt choose to be invested in.
Since you're overweight company stock why not sell some to cover purchase? Then, with the MM funds invest in something you prefer moving forward. Improve investment growth potential and reduce concentration in company stock.
Did you expect to make $ in a MM fund? Do you think you will moving forward? Dont expect real growth in MM.
Posted on 3/8/23 at 10:04 pm to TorchtheFlyingTiger
quote:
Did you expect to make $ in a MM fund?
Expected return aside and why MM to begin with…aside for a moment…
Negative real return: unrealized vs realized
If inflation rose and then fell, so too would the negative real return. SFC thinking or not?
Posted on 3/9/23 at 12:23 pm to Turf Taint
Sort of because you are considering holding on just because earlier performance was poor. But makes no sense even as SCF in this situation because doesnt sound like a situation where you could reasonably expect to recover loses by waiting for it to recover. Thus, even dumber than SCF. You keep saying taxes, allocation/diversification and expected performance aside. Those should be driving decision along with risk, investment objectives and timeline not what happened to previous investment. So, in that sense its SCF if you must label it. Either way sounds like youre stuck on stupid with this investment and realize it but dont want to act.
Posted on 3/9/23 at 12:48 pm to Turf Taint
quote:
overweighted company stock
You realize that’s not good, right? I’d be more concerned with that than some of the other issues you’re focusing on.
Posted on 3/9/23 at 1:30 pm to TorchtheFlyingTiger
quote:
You keep saying taxes, allocation/diversification and expected performance aside. Those should be driving decision along with risk, investment objectives and timeline not what happened to previous investment.
Good post, thx!
All those factors are front and center. In fact, have already acted upon using tax efficiency, expected return and risk/time horizon on next financial goal.
I’m most interested in keeping to the psychology of money points. You hit it for me, particularly on reasonableness of recovery. Stuck on stupid is not inaccurate, too.
This post was edited on 3/9/23 at 1:31 pm
Posted on 3/9/23 at 1:31 pm to Jag_Warrior
quote:
Overweighted
0.5% overweight. Not astronomical.
Quite the Boglehead in terms of allocation and risk here.
Posted on 3/9/23 at 1:52 pm to Turf Taint
What is the MM for? Investment? Emergency fund? Opportunity fund? Cash fund? Defacto saving account for infrequent large personal purchases?
If emergency fund, is the purchase an emergency?
And I agree with the recommendation of imagining all of the money in a pile in front of you, what would you do with the rest after you made this purchase? Use the answer to that to decide where you would draw from (as long as taxes don’t blow up the equation).
If emergency fund, is the purchase an emergency?
And I agree with the recommendation of imagining all of the money in a pile in front of you, what would you do with the rest after you made this purchase? Use the answer to that to decide where you would draw from (as long as taxes don’t blow up the equation).
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