“My ETF has reached the entry price - sell now?”

Many investors are repeatedly faced with the question: Should I sell my fund or ETF now that it has reached its purchase price after a long period of losses? Ali Masarwah, fund analyst and managing director of the financial services provider envestor, shows why this question is a classic investor mistake, what it is - and how investors should deal with it.

21 October, 2024 FRANKFURT (envestor). When it comes to funds and ETFs that invest in emerging market equities in particular, many investors are asking themselves the following question these days: after my fund or ETF has been in the red for many years, should I sell now that the entry price has been reached and I have recouped my losses? In contrast to other equity funds and ETFs, emerging market funds performed poorly after the crash from fall 2021, so the question is currently acute for these funds in particular, but the situation is transferable to many other market situations: Investors struggle with crash losses and get out as soon as an investment has returned to its entry price.

I take this question as an opportunity to present a classic investor mistake: the anchoring effect. It is behind this classic constellation, and its consequences are often pretty lousy investor returns.

We encounter the so-called anchor effect every day in the form of seemingly logical rules of thumb. It often leads to harmless misjudgements. For example, if you ask a Berliner to estimate the population of Frankfurt, they will probably take Berlin's population as a starting point and adjust it downwards. But probably not by enough. Conversely, someone from Neumünster will solve the task by taking the population of Neumünster as an anchor and adjusting it upwards. But probably not high enough.

So far, so harmless. But what if someone invested 15,000 euros in a fund ten years ago, suffered nasty losses and is eagerly awaiting the entry price? They will be relieved to sell when their portfolio reaches the 15,000 euro mark again. Investors may double their investment at this level - which happens less frequently - “because things are going up again”. Anyone who acts in this way has in all likelihood destroyed returns. Why?

It makes absolutely no sense to base investment decisions on entry prices. This is because these marks are set arbitrarily and are therefore completely irrelevant for the actual investment success. The anchor effect leads to investment decisions that are not based on any objective criteria, neither fundamental nor market-related. The anchor effect is usually based on spontaneous investments. Anyone who has entered an overheated market without reflection and is caught out by a crash will not find any good arguments to sell or buy - and will cling to the entry price.

The anchor effect leads to investors holding on to failed investments for too long or selling good funds too early. Both lead to low investor returns. Lest there be any misunderstanding: it can make sense to sell a fund that is performing poorly, just as it can make sense to buy more. It all depends on the motives. If investment theses are well-founded and there are objectively comprehensible reasons, it can make sense to buy or sell. The entry price, which is based on a purely subjective decision, is definitely not a good motivation for an investment. 

We should bear in mind that our brains often lead us astray when it comes to investments. We should therefore force ourselves to ignore artificially created brands. It is important to critically scrutinize the quality of an investment time and again. Were expectations met? If not, was it due to the fund manager's own research? Did the fund manager make mistakes? Has the ETF's investment universe been chosen incorrectly? (ETF providers also launch fashionable products that are also return killers in the medium term). Was the investment objective unrealistic? Did the market play a trick on us? Is our investment thesis still valid?

Investment decisions should be made on a rational basis. Although this does not guarantee success, it is always more promising than giving in to an irrational, spontaneous urge.