[Summary]
Sunk cost is the psychology of being bound by the costs you have already paid.
When sunk costs are replaced with actual examples, it becomes easier to see the difference between situations where they can be used and situations where they are difficult to use.
In actual investment, the starting point is to use it for loss cutting and withdrawal decisions. However, it is important to note that it is easy to become obsessed with getting back the invested funds.
In this article, we will organize sunk costs not as "knowledge" but as a step to check before buying or selling. Don't rush to conclusions, read according to your financial amount and time horizon.
First, divide by sunk cost
When looking at sunk costs, first determine what you want to judge. The information you need will change depending on whether you want to know the meaning, confirm before buying or selling, or review your current holdings.
Especially for beginners in investing, the easier the words are, the more they tend to take them as a conclusion. Sunk costs are not the only factor in determining decisions. If you want to check it, it is more realistic to look at it in conjunction with fund management, holding period, and opposing materials.
Thinking about sunk costs using an example
If we look at sunk costs as an example, we first make a narrow premise. It is important not to mix up whether you are talking about the market as a whole, individual stocks, NISA or long-term funds.
Checking the following points will make things a lot easier.
| Axis to check | What to look at with sunk costs |
|---|---|
| purpose | What do you use to judge? |
| Time axis | Which is closer to short-term trading, long-term holding, or NISA? |
| basis | Which one is more important: price, business performance, interest rates, exchange rates, or psychology? |
| risk | When things go the other way, where should you look again? |
| action | Will it lead to buying, selling, or doing nothing? |
Points that can easily cause trouble in making decisions
Sunk costs don't only stumble when you don't have enough knowledge. In fact, there are situations where we interpret something conveniently because we know a little bit about it.
- Focus on one situation where sunk costs work well
- Even if the price movements are similar, if the background is different, they are treated as different things.
- View not only successes but also failures using the same criteria.
- Check if you can reproduce it with your own amount of funds
The important thing here is not to settle on a single correct answer based solely on sunk costs. In investment, the meaning of the same material changes depending on the market, holding period, and amount of funds. When in doubt, prioritize confirmation over conclusion.
Checklist before buying and selling
Before using sunk costs as a deciding factor, check at least these five things.
- Can you explain in one sentence the purpose of looking at sunk costs?
- Have you confirmed one or more countermeasures or failure conditions?
- Are you investing your living funds or money that will be used soon?
- Have you decided in advance the criteria for cutting losses, taking profits, and continuing to hold stocks?
- Are you making judgments based only on social media or short headlines?
Checklists are simple, but they prevent you from adding reasons after making a decision. The purpose of checking sunk costs is not to act faster, but to reduce unnecessary mistakes in judgment.
Summary
Sunk costs are a material for organizing investment decisions. Even if you read it as an example, your judgment will be inaccurate if you treat it as a standalone buy/sell signal.
The points to keep in mind are as follows.
- Decide first the purpose of looking at sunk costs
- Do not mix time axis and amount of funds
- Check not only good materials but also negative materials
- When using NISA and long-term funds, consider how to handle losses
- When in doubt, reduce your position or postpone it.
The more knowledge you have, the safer it seems, but in the market it can become dangerous if you use it incorrectly. It is realistic to treat sunk costs as a tool to pause before buying or selling, rather than a word that forces you to make a hasty decision.