Periodically, I review my items and assets and consider what I should keep and what should be sold off. Generally, the older something gets, the more value it loses, so the longer you hold onto things that are not being used, the more it costs you. Around 5 years ago I had a set of gold clubs that, when new, cost around $1,500, but now were worth around $800. I realized that I was no longer interested in golfing and the set was no longer bringing value to me. Part of me wanted to keep the golf clubs in case someday I needed or wanted them. But the other part of me realized that the set is losing around $200 in value per year, and I don’t like them cluttering up my garage. When I find myself in these situations, I like to reverse the scenario and reconsider the question – if I didn’t own the item, and I had the money available today, would I purchase the item? For example, if I did not own golf clubs and this identical set was for sale for $800, would I buy it? The answer was no; if the role was reversed, I would not spend $800 on golf clubs that I was not planning to use any time soon. So instead of keeping the $800 golf club set, I sold it. Reversing the situation allows you to review the scenario from the opposite perspective which makes the decision easier. 

I have recommended this scenario to friends who have considered whether to sell ‘extra’ vehicles, and homes, or sell shares in a company. A friend of mine had lost around 50% of his $10,000 speculative investment in a company’s stock. He was deciding whether to hold onto the shares in hopes of a bounce-back or sell them to prevent further losses. I asked him to reverse the scenario – if you did not own the shares, would you invest $5,000 into this company today? His answer was a resounding ‘no’ since he had no confidence in the company’s future success. And, just like that, his decision was made. He sold the shares at a 50% loss. In the following months, the company’s value continued to decline. My true belief is that he would have held onto the shares had he not considered the situation as a reversed scenario.  

Part of what makes us want to naturally hold onto things is the sunk cost fallacy, whereby we (humans) are hesitant to change a strategy that we have already invested time, money, and/or energy into. I knew that my golf clubs had already cost me $700 in depreciation, so I might as well just hang onto them. My friend had already lost $,5000 on that stock trade, so he may as well hang onto it a little longer. These are two examples of where sunk costs were being used to justify continuing down a path that no longer makes sense. Over time, our priorities, goals, and situations change, necessitating periodic course corrections. To minimize the financial impact of these course corrections, it is best to review the list of items making up your net worth and track all spending to stay current with the changes in asset values, and what is costing you money. By maintaining visibility over your finances, you can more quickly identify the items that no longer fit with your personal/family goals, or that are no longer worth the cost or time.