The Sunk Cost Trap: Why You're Holding Losing Stocks Instead of Buying XEQT

In 2021, a coworker told me about a cannabis stock that was “guaranteed to double.” I bought $3,000 worth. Within six months, it was down 55%. I told myself I’d sell when it got back to my purchase price. Within a year, it was down 80%. I still held on. “I’ve already lost so much,” I reasoned, “what’s the point of selling now?”

That $3,000 is worth about $400 today. And the worst part isn’t the loss itself — it’s the opportunity cost. If I had sold at the 55% loss, taken my $1,350, and put it into XEQT, it would be worth roughly $2,100 by now. Instead, I held on out of stubbornness and watched it bleed to nearly nothing.

I was caught in the sunk cost trap. And if you’re reading this with a losing stock in your portfolio that you “can’t” sell, you probably are too.

1. What Is the Sunk Cost Fallacy?

The sunk cost fallacy is a cognitive bias where you continue doing something because of what you’ve already invested (time, money, effort) rather than what you’ll gain by changing course. In plain English: you throw good money after bad because admitting the first money is gone feels too painful.

In investing, it looks like this:

• “I bought this stock at $50. It’s at $22 now. I can’t sell at a loss.”
• “I’ve held this for three years. Selling now would mean those three years were wasted.”
• “I did so much research before buying. If I sell, it means I was wrong.”
• “It used to trade at $80. It’ll get back there eventually.”

None of these are rational investment decisions. They’re emotional protection mechanisms. Your brain is trying to avoid the pain of crystallizing a loss and admitting a mistake. But in doing so, it’s making the mistake worse.

2. Why Your Brain Does This: Loss Aversion Explained

Psychologists Daniel Kahneman and Amos Tversky demonstrated something remarkable about human psychology: the pain of losing is roughly twice as powerful as the pleasure of gaining. Lose $100 and you feel it about twice as intensely as the happiness from gaining $100.

This is called loss aversion, and it’s hardwired into our brains. It made sense when we were hunter-gatherers — losing your food supply was literally life-threatening. But in a modern investment portfolio, it’s catastrophic.

Loss aversion creates several destructive behaviors:

Anchoring to your purchase price

You bought a stock at $50. In your mind, $50 is the “real” value, and anything below that is “wrong.” But the market doesn’t care what you paid. The stock is worth what it’s worth today, regardless of your entry point. Your purchase price is completely irrelevant to the stock’s future performance.

The “break-even” fantasy

“I’ll sell when it gets back to even.” This might be the most expensive sentence in investing. Here’s why the math is brutal:

A stock down 50% needs to double just to get back to where you bought it. A stock down 80% needs to go up 400%. How many stocks have you seen go up 400%? Compared to how many you’ve seen go down 80%?

The break-even fantasy keeps investors trapped in losing positions for years — sometimes forever — waiting for a recovery that statistically is unlikely to happen.

Ego protection

Selling at a loss means admitting you made a bad decision. Nobody likes being wrong. So instead of acknowledging the mistake and moving on, investors hold the losing position to preserve the illusion that they haven’t lost anything yet. “It’s only a loss if you sell,” they say.

But that’s like saying your house isn’t on fire as long as you don’t look at the flames. The loss is real whether you crystallize it or not. Your portfolio’s value is what it is today, not what you wish it were.

3. The Real Cost: Opportunity You’re Throwing Away

Here’s what sunk cost investors miss: every dollar sitting in a losing stock is a dollar that could be compounding in XEQT.

This is called opportunity cost, and it’s invisible — which is why most people ignore it. But the numbers are staggering.

Let’s say you have $10,000 stuck in a stock that’s down 40% from your purchase price. You’re holding it, hoping it’ll recover. Meanwhile:

Even if your losing stock recovers somewhat, XEQT’s global diversification has historically delivered better returns than individual stock recoveries. And if the stock stays flat — which many fallen stocks do — the gap is enormous.

The question isn’t: “How much have I already lost?”

The question is: “Where will this money grow the most from today forward?”

Your purchase price is history. It’s gone. The only thing that matters is what you do with the money you have right now.

4. Five Signs You’re Caught in the Sunk Cost Trap

Be honest with yourself. Do any of these sound familiar?

Sign 1: “I’ll sell when it gets back to even”

You’ve set a mental price target that has nothing to do with the company’s fundamentals and everything to do with your ego. This is the textbook sunk cost trap.

Sign 2: “I’ve been holding for X years, I can’t sell now”

The length of time you’ve held a losing investment makes it harder to sell, not easier. But time invested is another sunk cost. Three years of holding a loser doesn’t mean you owe it a fourth year.

Sign 3: You avoid looking at the position

If you cringe when you see the stock in your portfolio and deliberately avoid checking its price, your subconscious already knows it’s a bad investment. You’re using avoidance as a coping mechanism instead of taking action.

Sign 4: “I did so much research”

The hours you spent researching a stock before buying it are sunk costs too. Your research doesn’t change the company’s future prospects. Markets are dynamic. What looked like a great investment two years ago might genuinely be a bad one today. Smart investors update their thesis; trapped investors cling to their original research.

Sign 5: You keep finding reasons to hold

“The CEO just changed.” “They’re expanding into a new market.” “This analyst says it’s a buy.” If you’re constantly searching for reasons to justify holding a losing position, you’re engaged in confirmation bias — another cognitive trap that works hand-in-hand with sunk cost thinking.

5. The Silver Lining: Tax Loss Harvesting

Here’s the good news that might make selling a losing stock easier to swallow: in a non-registered (taxable) account, your loss actually saves you money on taxes.

This is called tax loss harvesting, and it works like this:

1. You sell a stock at a loss (say, $3,000 loss)
2. You use that $3,000 capital loss to offset capital gains elsewhere in your portfolio
3. If you have no gains to offset this year, you can carry the loss back 3 years or forward indefinitely
4. You take the sale proceeds and invest in XEQT

Example:

• You bought Stock ABC for $8,000. It’s now worth $5,000. (Unrealized loss: $3,000)
• You sold Stock XYZ earlier this year for a $4,000 capital gain
• You sell ABC, realize the $3,000 loss, and offset it against your $4,000 gain
• You now only pay tax on $1,000 of gains instead of $4,000
• At a 25% marginal tax rate on the taxable portion, that’s roughly $375 in tax savings
• You invest the $5,000 from selling ABC into XEQT

You’ve converted a losing position into a tax benefit AND repositioned that money into a globally diversified ETF. That’s a double win.

Important note: The CRA has a “superficial loss” rule. If you sell a stock at a loss and buy the same stock (or an identical one) within 30 days before or after the sale, the loss is denied. But this doesn’t apply if you sell Stock ABC and buy XEQT — they’re completely different securities. So selling your individual losers and buying XEQT is perfectly fine from a tax perspective.

6. How to Rip Off the Bandaid: A 3-Step Process

Knowing you should sell and actually doing it are two different things. Here’s a practical process to help:

Step 1: The Zero-Based Portfolio Test

Ask yourself this question for every position in your portfolio: “If I had cash instead of this stock, would I buy it today?”

Not “would I hold it?” Not “is it okay?” Would you actively choose to buy it at today’s price with today’s information?

If the answer is no, you should sell. The fact that you already own it is irrelevant. You’re effectively choosing to “buy” it every day you hold it, because you’re choosing not to sell and invest elsewhere.

Step 2: Set a deadline

Don’t say “I’ll sell eventually.” Pick a date. Write it in your calendar. “On [date], I will sell [position] and invest the proceeds in XEQT.” Having a specific date removes the endless procrastination loop.

If you need to ease into it, sell half on the deadline and the other half two weeks later. But commit to the date.

Step 3: Execute and don’t look back

Sell the position. Buy XEQT with the proceeds. Then do not check what the old stock does. This is critical. If you sell and the stock jumps 15% the next week, you’ll feel terrible and doubt your decision. But that’s just noise. Over the long run, a globally diversified portfolio will almost certainly outperform any individual stock you were holding out of hope.

Remove the ticker from your watchlist. Delete it from your tracking app. Move on.

7. “But What If It Recovers Right After I Sell?”

This is the fear that keeps everyone trapped. And yes, sometimes it happens. You sell, and the stock bounces. It feels awful.

But consider the data:

• Stocks that decline 50%+ have a significantly lower probability of recovering to their previous highs compared to the broad market
• Many fallen stocks (especially in speculative sectors like cannabis, crypto-adjacent companies, or recent IPOs) never recover
• Meanwhile, a globally diversified index fund like XEQT has recovered from every single downturn in history — 100% of the time

You’re not making a bet on one stock versus another. You’re making a bet on the probability of recovery: a single wounded company versus the entire global economy. The global economy always recovers. Individual companies often don’t.

And even if the stock does recover after you sell, you haven’t “lost” money. You’ve redeployed your capital into something with better expected returns. Over a 10-20 year period, XEQT is overwhelmingly likely to outperform a basket of individual stocks that went through significant declines.

8. Real Stories: The Cost of Holding On

Let me give you a few examples of stocks Canadian investors commonly held through devastating losses:

Every single one of these had investors saying “I’ll wait for the recovery.” Some are still waiting. Meanwhile, $10,000 invested in a global index fund in 2008 would be worth roughly $55,000+ today.

The sunk cost trap doesn’t just cost you the money in the losing stock — it costs you all the growth you would have earned if that money had been working for you elsewhere.

9. Building a “No More Sunk Costs” Portfolio

Once you’ve sold your losing positions and moved to XEQT, here’s how to make sure you never fall into the sunk cost trap again:

Go all-in on XEQT (or mostly)

The simplest way to avoid stock-picking mistakes is to stop picking stocks. XEQT gives you exposure to 9,000+ companies in a single ETF. You don’t need to analyze earnings reports, worry about CEO departures, or stress about sector rotations. One ticker. Done.

If you still want to pick individual stocks, consider the core and satellite approach — 80-90% XEQT, 10-20% for individual picks. That way, even if a stock pick goes to zero, it only impacts a small portion of your portfolio.

Automate your investing

Set up recurring XEQT purchases on Wealthsimple. When investing is automatic, you remove the emotional decision-making that leads to sunk cost thinking. You’re not “deciding” to invest each month — it just happens.

Stop checking individual stock prices

If you hold XEQT and nothing else, there’s no reason to check your portfolio more than once a month. The less you look, the less opportunity for emotional decision-making.

Pre-commit to a loss limit

If you do hold any individual stocks, set a rule before you buy: “If this drops 25%, I sell — no exceptions.” Write it down. Tell someone. Having a pre-determined exit point eliminates the sunk cost trap before it starts.

10. The Freedom of Letting Go

I want to end with something that doesn’t get talked about enough: selling a losing stock feels terrible for about 48 hours, and then it feels amazing.

The psychological weight of carrying a losing position is real. Every time you open your portfolio, there it is — a red reminder of a bad decision. It occupies mental space. It creates anxiety. It makes you feel like a bad investor.

When you sell it, that weight lifts. You take the cash, buy XEQT, and suddenly your portfolio is clean. Simple. Growing. No more dead weight. No more hoping. No more checking a stock price and feeling your stomach drop.

The loss already happened. Selling doesn’t create the loss — it frees you from it. And the sooner you redirect that capital into something productive, the sooner it starts working for you again.

Your portfolio doesn’t care about your feelings. The stock market doesn’t know what price you bought at. The only question that matters is: from today forward, where will this money do the most good?

For almost everyone, the answer is XEQT.

Related posts:

• Should I Sell My Stocks for XEQT?
• XEQT vs Individual Stocks: Which Strategy Wins?
• Tax Loss Harvesting with XEQT
• 7 Investing Mistakes XEQT Helped Me Stop Making