Loss Aversion and XEQT: Why Losing $1,000 Hurts More Than Gaining $2,000

I still remember the exact moment my stomach dropped.

It was a Tuesday morning in September 2022. I was making coffee and – against my own advice – opened the Wealthsimple app on my phone. My XEQT position was down $3,400 from where it had been a few months earlier. Not a catastrophic number, not a life-changing loss. But I felt it in my chest. That hollow, sinking feeling like stepping off a curb you didn’t see. I put my phone face-down on the counter and stared at the wall for a full minute.

Here is the part that still bothers me: just five months before that morning, my portfolio had gained roughly $4,000 over a stretch of steady market growth. Four thousand dollars. More than the $3,400 I was now staring at in red. And you know what I felt when the portfolio was climbing? Basically nothing. A mild, pleasant hum. I checked the app, thought “nice,” and went back to whatever I was doing. The gain was bigger than the loss, but the loss consumed my entire morning. I was distracted at work. I ran the numbers three times. I caught myself Googling “should I sell my ETFs before a recession” before I even realized what I was doing.

That was the day I truly understood loss aversion – the most powerful, most universal, and most financially destructive cognitive bias that affects investors. It is the invisible force that makes corrections feel like emergencies and rallies feel like background noise. And if you are a Canadian investor holding XEQT, it is almost certainly working against you right now, whether you realize it or not.

1. What Is Loss Aversion?

Loss aversion is the psychological phenomenon where the pain of losing something is felt roughly twice as intensely as the pleasure of gaining the same thing. Lose $1,000 and it hurts. Gain $1,000 and it feels… fine. Decent. But nowhere near as emotionally powerful as the loss.

This is not a quirky personality trait or a sign of weakness. It is a fundamental feature of human psychology, and it was first formally described by psychologists Daniel Kahneman and Amos Tversky in their groundbreaking 1979 paper on prospect theory – work that eventually helped earn Kahneman the Nobel Prize in Economics in 2002.

The Prospect Theory Framework

Kahneman and Tversky discovered that people do not evaluate outcomes in absolute terms. Instead, we evaluate them relative to a reference point – usually where we are right now, or where we started. Gains and losses are measured from that reference point, and here is the critical finding: the curve is not symmetrical.

Imagine a graph. The horizontal axis represents gains and losses in dollars. The vertical axis represents how good or bad you feel – your subjective psychological value. Now picture an S-shaped curve running through the centre.

On the gain side (right of centre), the curve rises, but it flattens out quickly. Going from a $0 gain to a $1,000 gain feels great. Going from $1,000 to $2,000? Still good, but less exciting per dollar. The pleasure diminishes as the gains get bigger.

On the loss side (left of centre), the curve drops – and it drops steeply. Going from $0 to a $1,000 loss feels terrible. Going from $1,000 to $2,000 in losses? Even worse, and the pain per dollar is intense. The curve on the loss side is roughly twice as steep as the curve on the gain side.

This is the famous asymmetry. Researchers have consistently found the ratio to be approximately 2:1 – a loss of a given amount produces roughly twice the psychological impact as a gain of the same amount. Some studies have put the ratio as high as 2.5:1.

What This Means in Plain English

If you own $50,000 worth of XEQT and it drops 10% to $45,000, the emotional pain you feel is roughly equivalent to how much pleasure you would need a $10,000 gain (a 20% increase) to offset. Not a $5,000 gain. A $10,000 gain. Your brain treats losses and gains on completely different scales.

Key insight: Loss aversion is not about being pessimistic or fearful. It is a hardwired asymmetry in how your brain processes outcomes. Even confident, experienced investors are subject to it.

This is what makes loss aversion so dangerous for XEQT investors. The market goes up roughly 70-75% of calendar years over the long term, which means gains are far more common than losses. But because each loss hits twice as hard emotionally, the minority of bad years can dominate your experience and drive you to make terrible decisions.

2. How Loss Aversion Manifests in XEQT Investing

Loss aversion does not just make you feel bad when your portfolio drops. It actively changes your behaviour in ways that cost you real money. Here are the five most common ways I have seen it play out – and I have been guilty of every single one at some point.

a) Panic Selling During Corrections

This is the most obvious and most expensive manifestation. The market drops 15-20%, your XEQT position is deep in the red, and every fibre of your being screams: get out before it gets worse.

The logic feels airtight in the moment. “I’ll sell now, wait for the bottom, and buy back in lower.” But this logic has two fatal flaws. First, you have no idea when the bottom is. Nobody does. Second, by the time you feel scared enough to sell, most of the damage has already been done. You are selling at the worst possible time.

Loss aversion is what provides the emotional fuel for panic selling. The pain of watching your portfolio bleed is so intense that doing anything – even something financially destructive – feels better than sitting still. Selling provides immediate emotional relief. It stops the pain. And that short-term relief is what your brain craves, even though it costs you thousands of dollars in long-term returns.

b) Refusing to Invest Because You Might Lose Money

I have talked to friends and family who keep tens of thousands of dollars in savings accounts earning 2-3% because they are terrified of seeing red numbers. When I suggest XEQT, the first thing they say is: “But what if it drops?”

Loss aversion makes the possibility of a loss feel more real and more important than the probability of long-term gains. A savings account guarantees you will never see a red number – but it also guarantees you will lose purchasing power to inflation every single year. The irony is that by avoiding the visible loss, you are accepting an invisible one. But invisible losses do not trigger loss aversion because you never see them on a screen.

The opportunity cost of staying in cash is enormous. A person who kept $50,000 in a savings account instead of XEQT over the last five years has given up tens of thousands of dollars in potential growth – but because that loss never showed up as a red number on a screen, it does not register emotionally. Loss aversion only punishes you for losses you can see.

c) Checking Your Portfolio Too Frequently

This one is subtle but incredibly damaging. On any given day, the probability of XEQT being up or down is close to a coin flip – maybe 53% positive, 47% negative. If you check your portfolio every single day, you are guaranteeing that you will see red numbers roughly half the time. And thanks to the 2:1 asymmetry, those red days will hurt more than the green days feel good.

The math is fascinating. If you check your portfolio daily, your emotional experience of investing is net negative even in a year where your total return is strongly positive. You might finish the year up 12%, but you will have experienced hundreds of small emotional gut punches from all those individual red days. Your overall “feeling” about investing will be negative, even though your outcome was excellent.

Now compare that to checking quarterly. Over any given three-month period, XEQT is positive the vast majority of the time. You see green numbers almost every time you look. Same portfolio, same returns – but a completely different emotional experience. Checking less often is not laziness or ignorance. It is a strategic defence against loss aversion.

d) Moving to “Safe” Investments After a Dip

After a market drop, loss aversion often drives investors to shift their XEQT position into bonds, GICs, or cash. “I’ll wait until things stabilize and then get back in.” This feels responsible and prudent. In reality, it is locking in your losses and then missing the recovery.

I’ve written about other cognitive biases that work alongside this one – recency bias makes you believe the recent downturn will continue indefinitely, and anchoring bias keeps you fixated on your pre-crash portfolio value. But loss aversion is the engine that drives the decision. The pain of recent losses is so overwhelming that you will sacrifice long-term returns just to make it stop.

The data on this is brutal. Studies consistently show that investors who shift to “safe” assets after downturns and then try to time their re-entry underperform buy-and-hold investors by several percentage points per year. The cost of emotional comfort is very, very high.

e) Selling Winners Too Early to “Lock In Gains”

This is the flip side, and it connects to what behavioural economists call the disposition effect. When an investment goes up, loss aversion makes you anxious about giving back those gains. “I’m up 15% on XEQT this year – maybe I should sell some to lock it in before it drops.”

The fear here is not about the investment itself. It is about the psychological shift from “gains” to “losses.” Once you have gains, those gains become part of your mental reference point. Losing them would feel like a real loss, not just a decrease in gains. So you sell early to protect yourself from the possibility of feeling that loss.

This is one of the most counterintuitive traps in investing: loss aversion makes you too willing to sell your winners and too reluctant to sell your losers. You cut your flowers and water your weeds, to use the old expression. With a long-term hold like XEQT, selling early to “lock in gains” is almost always the wrong move.

3. The Math That Should Override Your Emotions

I find it genuinely helpful to look at the hard data when loss aversion is whispering in my ear. Here is what the numbers actually say:

Every major market crash in history has been followed by a recovery. Every single one. The Great Depression, Black Monday in 1987, the dot-com bust, the 2008 financial crisis, the COVID crash in 2020 – every one of them was followed by a recovery that eventually exceeded the previous peak.

Let us look at some specific recoveries:

• COVID crash (2020): The market dropped roughly 34% in about five weeks. Within five months, it had fully recovered. Investors who panic sold at the bottom locked in a 34% loss. Investors who held did nothing and were made whole within months.
• 2008 financial crisis: The market dropped roughly 50% from peak to trough. It took about four years to fully recover. That sounds like a long time, but four years is a blink in the context of a 30+ year investing horizon. And investors who continued buying during those four years saw some of the best returns of their lives.
• Dot-com bust (2000-2002): A brutal, extended downturn. Yet even this was fully recovered within a few years, and the market went on to reach dramatically higher highs.

Now consider XEQT specifically. Since its inception in 2019, it has weathered the COVID crash, the 2022 rate-hike selloff, and several smaller corrections. Through all of it, the long-term trend has been upward. Not in a straight line – never in a straight line – but upward.

Key insight: The temporary pain of a market downturn is real, but the permanent cost of reacting to that pain is far greater. Every dollar you panic-sell at the bottom is a dollar that does not participate in the recovery.

Here is a concrete example. Suppose you held $40,000 in XEQT in early 2020. During the COVID crash, your position dropped to roughly $26,400. If you panic-sold at that point, you locked in a $13,600 loss. By year-end, XEQT had not only recovered but was trading above its pre-crash level. Your $40,000 would have been worth roughly $43,000 by December 2020. The difference between panicking and holding? Nearly $17,000 in a single year. That is the real cost of loss aversion.

4. Practical Strategies to Overcome Loss Aversion

Understanding loss aversion is important, but understanding alone is not enough. You need systems and habits that protect you from your own brain. Here are the strategies that have worked for me.

a) Automate Everything

The single most effective tool I have found against loss aversion is automation. I use Wealthsimple’s auto-invest feature to buy XEQT on a fixed schedule – every payday, the same amount, no matter what the market is doing. I do not have to make a decision. I do not have to look at a price. I do not have to convince myself that now is a good time to buy.

Automation removes the emotional decision point entirely. When the market is down, my automatic purchase buys more shares at a lower price. When the market is up, it buys fewer shares at a higher price. I do not have to fight my loss aversion because there is no moment where my brain gets to weigh in. The money moves before my emotions can interfere.

If you are not automating your XEQT purchases, this is the single highest-impact change you can make. It is free, it takes five minutes to set up, and it neutralizes the most expensive bias in your psychological toolkit.

b) Check Your Portfolio Less Frequently

I mentioned this earlier, but it deserves its own section because of how powerful it is. I have a personal rule: I check my portfolio no more than once per quarter. That is four times a year.

This was hard to implement at first. The urge to check – especially during volatile markets – is almost physical. But I have found that the less I look, the better my decision-making becomes and the better I feel about investing. When I check quarterly, I almost always see green. My emotional experience of investing is overwhelmingly positive, which reinforces my commitment to the strategy.

If checking quarterly feels impossible, start with monthly. Even going from daily to monthly dramatically reduces your exposure to the small, random red days that trigger loss aversion. Delete the app from your phone’s home screen. Turn off price alerts. Make it inconvenient to check. The friction is your friend.

c) Zoom Out – Look at the Long-Term Chart

When you are in the middle of a correction, it feels like the world is ending. But if you zoom out on any broad market chart – including XEQT’s – every correction looks like a minor dip in the context of the long-term upward trend.

Here is a mental exercise I use: imagine looking at a chart of the S&P 500 or the global equity market over the last 50 years. Now try to find the 2020 COVID crash on that chart. Can you see it? Barely. It is a tiny blip in an overwhelmingly upward trajectory. The same is true for the 2022 correction, the 2018 selloff, and most of the other drops that felt absolutely devastating when you were living through them.

When loss aversion is screaming at you to sell, zoom out. Look at the five-year chart. The ten-year chart. Remind yourself that you are investing for decades, not days.

d) Reframe: A Dip Is a Discount, Not a Disaster

This reframing has been genuinely transformative for me. When XEQT drops 10%, that is not a crisis – it is a sale. You are getting the same 9,000+ companies, the same global diversification, the same automatic rebalancing, just at a 10% discount.

If your favourite grocery store put everything on sale for 10% off, you would not run out of the store in a panic. You would buy more. The stock market is the only store where people flee when prices drop. Loss aversion is the reason. When you can reframe a correction as a buying opportunity rather than a threat, you fundamentally change your emotional relationship with downturns.

I am not saying this is easy. When your portfolio is bleeding, your brain is not interested in clever reframes. But if you practise this thinking when times are good, it becomes an available mental model when times are bad. It does not eliminate the pain, but it gives you a counter-narrative to the panic.

e) Write an Investment Policy Statement When You Are Calm

An investment policy statement (IPS) is a short document you write when you are in a calm, rational state of mind. It lays out your strategy, your time horizon, and most importantly, your plan for market downturns.

Mine says something like: “I invest in XEQT for the long term. I will not sell during corrections. If the market drops more than 20%, I will increase my contributions rather than decrease them. I accept that short-term losses are the price of long-term gains.”

When loss aversion hits, I read this document. It was written by the rational version of me, speaking to the emotional version of me. It is not foolproof, but it gives me an anchor when my brain is telling me to do something stupid.

f) Calculate What Panic Selling Actually Costs

One of the most effective ways to fight loss aversion is to make the cost of acting on it concrete. Run the numbers. If you sell $40,000 of XEQT during a 20% correction and the market recovers within two years (as it usually does), how much does that decision cost you?

Let me lay it out:

• You sell at $32,000 (your $40,000 minus the 20% drop)
• The market recovers in two years and your original position would be worth $44,000 (accounting for the recovery plus continued growth)
• Your cash has earned maybe $1,500 in a savings account during those two years
• Net cost of panic selling: roughly $10,500

That is not an abstract number. That is real money. That is a vacation. That is several months of XEQT contributions. That is years of compounding lost forever. Writing these numbers down before a correction hits makes them available to your rational mind when loss aversion tries to take over.

5. The Counterintuitive Truth About Loss Aversion

Here is the thing that made loss aversion finally click for me: it is not a bug in your brain. It is a feature that worked perfectly for thousands of years.

Think about our ancestors on the savanna. If you found a bush full of berries, that was nice – you would eat well that day. But if you lost your food supply, your shelter, or your territory, you could die. In the environment where our brains evolved, losses were genuinely more consequential than gains. A gain was a nice bonus. A loss could be fatal.

So our brains evolved to weight losses much more heavily than gains. The anxiety, the physical dread, the compulsive checking – all of that was adaptive behaviour designed to keep you alive in a world where losses were existential threats.

The problem is that investing is nothing like the savanna. A 20% drop in your XEQT portfolio is not a threat to your survival. You are not going to starve. You are not going to lose your shelter. You are experiencing a temporary fluctuation in the market value of an asset you do not need to sell for decades. But your brain does not know that. It responds to the red numbers with the same neurological cascade – cortisol, adrenaline, fight-or-flight – that it would deploy if a predator walked into your camp.

Key insight: Your brain treats a portfolio loss like a survival threat. Recognizing this – truly internalizing that your evolutionary wiring is mismatched with the investing environment – is the first step toward disarming loss aversion.

This is why “just don’t panic sell” is such useless advice. You are fighting millions of years of evolution. Willpower alone is almost never enough. What you need are systems – automation, reduced portfolio checking, pre-written investment plans – that remove the decision from your hands before your loss-averse brain can get involved.

It is also worth noting that loss aversion does not weaken with experience. Seasoned investors feel the same pain as beginners. What changes with experience is not the feeling but the response. Experienced investors have systems, habits, and frameworks that prevent the feeling from turning into action. They have felt the pain before, recognized it for what it is, and chosen to do nothing. That is the skill. Not eliminating the pain, but building a life where the pain cannot reach the sell button.

6. The Investors Who Build the Most Wealth Do Nothing

I want to leave you with the most counterintuitive truth in all of investing: the investors who build the most wealth are not the ones who make the best decisions. They are the ones who avoid making bad decisions.

There is an often-cited (and possibly apocryphal) story about a study of Fidelity accounts that found the best-performing accounts belonged to people who were either dead or had forgotten they had an account. Whether or not the study is real, the underlying truth is well-supported by data. The less you tinker, the better you do.

XEQT is specifically designed for this kind of investor. It holds over 9,000 companies across the globe. BlackRock rebalances it for you. There is nothing to manage, nothing to time, nothing to optimize. Your only job is to keep buying and to not sell during downturns. That is it. That is the entire strategy.

And yet that second part – not selling during downturns – is where most investors fail. Not because they lack intelligence or discipline, but because loss aversion is the most powerful bias in the human psychological toolkit, and it has been quietly sabotaging investors since the first stock exchange opened.

The next time the market drops and your stomach clenches and every instinct tells you to do something – remember that the “something” your brain wants you to do is almost certainly the most expensive thing you could possibly do. The dread is real. The danger is not. The correction is temporary. The cost of acting on your fear is permanent.

Close the app. Go for a walk. Read your investment policy statement. And let XEQT do what it was built to do.

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