Last reviewed: July 2026
Yes, and the anchor is almost always the price you paid. Anchoring bias quietly ties your hold-or-sell decisions to your purchase price, a number the market neither knows nor cares about, so you hold losers waiting to get back to even and sell winners too early. Per the SEC, behavioral decisions like these cost investors 1 to 2 percentage points a year.
The purchase price feels like the reference point for everything that follows. It isn’t. A position is worth what it’s worth today, and whether to hold it should turn on its expected future return, not on recovering your entry point.
Key Takeaways
- Anchoring bias is over-relying on your purchase price, a number the market neither knows nor cares about.
- Per the SEC, investors underperform their own funds by 1 to 2 percentage points a year through behavioral entry and exit decisions.
- Common traps include the break-even trap, round-number targets, and anchoring retirement income to current income instead of spending.
- Per IRS Publication 550, capital losses offset gains and up to $3,000 of ordinary income a year, with the rest carried forward.
- A useful test: would you buy each position today, at its current price, if you held no purchase history?
About the Author
About the Author: Jeff Judge, CFP®, AEP®, ChFC®, CLU® is a financial planner who writes Viewpoints for JeffJudgeCFP.com. He helps families and business owners build portfolios and policies that judge each position on its future, not its purchase price, using the R.U.D.D.E.R. Method™, the financial planning process Jeff developed. “The market doesn’t know what you paid, and it doesn’t care. The purchase price is history. The investment decision is forward-looking.”
What is anchoring bias in investing?
The definition: Anchoring is the cognitive tendency to rely too heavily on the first piece of information encountered when making a decision. In investing, the anchor is almost always the price at which you bought a position. That number becomes the reference point against which you measure everything that follows.
How it shows up: You hold a stock that has dropped 40% because you’re waiting to get back to even before you sell. You won’t sell at a loss because the purchase price feels like a floor. Or you sell a position that’s up 50% because it “already had a good run”, using the purchase price as the ceiling, not the intrinsic value or expected future return.
Why the purchase price is actually irrelevant: The market doesn’t know what you paid. It doesn’t care. A position that’s down 40% from your purchase price is worth exactly what it’s worth today, and the question of whether to hold or sell should be based entirely on its expected future return relative to alternatives, not on recovering your entry point. The purchase price is history. The investment decision is forward-looking.
What does anchoring actually cost investors? Per SEC investor education data, investors in actively managed funds consistently underperform the funds themselves by 1 to 2 percentage points annually because of behavioral decisions around entry and exit. Anchoring to purchase price is one of the primary mechanisms.
Which specific anchoring patterns are worth watching for?
The break-even trap is the most common. You hold a losing position far longer than the investment merit justifies because selling at a loss feels like admitting failure. Every month you hold a position that belongs somewhere else is a month your capital isn’t working as hard as it could be.
The round-number anchor is subtler. People set implicit targets like “I’ll sell when it gets back to $100” or “I’ll rebalance when the portfolio hits $500,000”, and treat those numbers as real events rather than arbitrary references. The number that matters is whether the current allocation still serves your plan. Round numbers don’t determine that.
The reference class anchor is the most expensive in retirement planning. People anchor their retirement income expectations to their current income rather than their actual spending. If you’re earning $250,000 and spending $150,000, you need to replace $150,000 in retirement, not $250,000. But the higher number, having been present for decades, becomes the anchor. It leads to portfolios that are worked too hard, retirements that are deferred too long, and savings rates optimized for the wrong target.
Should you anchor retirement income to your salary or your spending?
To your spending. If you earn $250,000 but live on $150,000, you need to replace roughly $150,000, not $250,000. Anchoring to the salary, the bigger number you have seen for years, inflates the target and can push you to save harder and retire later than the plan actually requires.
How do you identify anchoring in your own financial decisions?
The diagnostic question is simple: are you basing this decision on what happened in the past, or on what’s likely to happen next?
When you think about a position in your portfolio, do you know what you paid for it before you know what it’s worth? If yes, the anchor is already influencing you. Reframe the question. Imagine you received this exact portfolio today with no purchase history attached. Would you buy each position at its current price, in its current size, given your current goals? If not, the anchor is the reason you’re still holding it.
According to IRS Publication 550, investment decisions that result in capital losses can be deductible against capital gains and up to $3,000 of ordinary income per year, with remaining losses carried forward. In other words, the tax code specifically accommodates the act of selling at a loss. The anchor that says “I can’t sell at a loss” is behavioral, not financial.
Is selling an investment at a loss always a mistake?
No. A loss can be useful. Per IRS Publication 550, realized capital losses offset capital gains and up to $3,000 of ordinary income a year, with the remainder carried forward. If a position no longer fits your plan, holding it just to avoid a paper loss usually costs more than selling.
Frequently Asked Questions
What is anchoring bias in investing?
Anchoring bias is leaning too heavily on the first number you saw, which in investing is almost always your purchase price. That figure becomes the reference point for hold-or-sell decisions, even though the market does not know or care what you paid. The right basis is a position’s expected future return.
How does anchoring to purchase price cost money?
It makes you hold losers waiting to break even and sell winners that already had a run, both based on entry price rather than outlook. Per the SEC, investors trail their own funds by 1 to 2 percentage points a year, and anchoring is a primary mechanism behind it.
How can I tell if anchoring is influencing me?
Ask one question: would you buy each position today, at its current price and size, if you held no purchase history? If the answer is no, the anchor is why you still own it. Noticing whether you recall what you paid before what it is worth is another tell.
Can I deduct an investment loss if I sell?
Often, yes. Per IRS Publication 550, capital losses first offset capital gains, then up to $3,000 of ordinary income per year, with any remainder carried into future years. The tax code is built to accommodate selling at a loss, so the refusal to do so is behavioral, not financial.
How do you build a portfolio that ignores what you paid?
A written investment policy statement that specifies the conditions under which you’ll rebalance, trim, or exit positions, written before the emotions of a specific holding are involved, is the most practical structural fix. When you’re executing against a policy, the purchase price becomes irrelevant because the policy doesn’t care about it.
Regular portfolio reviews that start from the current allocation and ask whether it’s appropriate going forward, rather than reviews that start from a performance attribution that keeps the purchase price in view, are better designed against anchoring.
The positions that are hardest to sell are almost always the ones you should examine most carefully. The attachment to the anchor is strongest where the potential regret of selling at a loss is highest. That’s exactly the moment when the decision is most likely being made by the anchor rather than the analysis.
Schedule a no-obligation call with Jeff to review whether your portfolio is positioned based on what you paid or based on what you actually need it to do.
The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn’t guarantee future results. Consult with qualified financial professionals regarding your specific situation. Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a registered investment advisor and separate entity from LPL Financial. © 2026 JeffJudgeCFP.com | Not to be reproduced in whole or in part. All rights reserved.